## Preface — IMF Technical Assistance Report (tarea2025071-source-pdf)

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---

### Mission overview
- Mission dates: March 10 to March 14, 2025.
- Requesting authorities: Financial Superintendency of Colombia (SFC), Financial Regulation Unit of the Ministry of Finance and Public Credit (URF), and Banco de la República (BanRep).
- Mission team: Nick Green (external expert) and Richard Stobo (MCM).
- Mission activities:
  - Collected detailed information via questionnaire and data request.
  - Onsite meetings with Governor Villar and other senior BanRep officials, representatives of the SFC and URF, and a range of private sector market participants.

### Executive summary — key findings and analytical context
- Purpose: Assess the regulatory framework for liquidity risk management of open-ended investment funds (OEFs) and identify potential improvements.
- International context: Aligns with recent international policymaker focus, notably FSB and IOSCO, on:
  - Alignment between funds’ asset liquidity and redemption policies.
  - Role of liquidity management tools (LMTs) such as gates and deferred redemptions.
- Identified supervisory gap:
  - SFC obtains extensive data on OEF liquidity developments but lacks certain unilateral powers to operationalize interventions (e.g., unilaterally suspend dealings; direct conversion of an OEF to a CIS with permanence).
- MMF sector characterization and recommendation:
  - Colombian market is characterized as exclusively a “prime” MMF market; no “government” MMF sub-sector observed.
  - Recommended adjustments to weighted average maturity (WAM) and weighted average life (WAL) thresholds to reduce MMF risk profile in line with international standards.
  - Consider permitting MMFs to invest more than the current 5 percent maximum unhedged exposure to non-COP denominated assets to increase access to liquid foreign-currency money market instruments.
- Fixed income OEFs:
  - Although covered by strong rules on minimum liquidity (including the Liquidity Risk Indicator, LRI), additional measures are recommended:
    - Complement the LRI with an explicit maximum percentage of NAV investable in illiquid assets.
    - Require a minimum share of diversified portfolio assets by issuer type to reduce concentration in a small number of corporate debt issuers.
    - Consider requiring a minimum level of OEF holdings that are both liquid and listed on an applicable exchange to incentivize exposure to listed sovereign debt.
  - These measures are confined to fixed income OEFs; MMFs addressed separately (WAM/WAL focused).
- Liquidity Management Tools (LMTs):
  - Recommend clarifying available LMTs in rules, laws, and guidance.
  - LMTs of most benefit: share classes with notice periods, gates, and minimum balance at risk requirements.
  - Use of LMTs should augment, not substitute for, portfolio-liability alignment.
- Inter-agency coordination:
  - Recommend establishing a cross-agency working group (BanRep, SFC, URF) to assess recommendations and set a risk appetite for systemic risks posed by OEFs.
  - Working group to manage trade-offs (e.g., bank funding vs investor protection) and serve as primary contact for industry interactions on timing and implementation.

### Recommendations (Table 1 summary)
- Recommendation 1: Supervision of OEF liquidity (SFC and URF)
  - Action: Change applicable rules and laws to better enable effective supervision of OEF liquidity risk.
  - Priority: 3
  - Timeframe: Medium Term
- Recommendation 2: MMF Risk Profile (SFC and URF)
  - Action: Change applicable rules and laws to reduce risks capable of being taken by MMFs and reduce MMF sector vulnerabilities.
  - Priority: 2
  - Timeframe: Medium Term
- Recommendation 3: Liquidity of Fixed Income OEFs (SFC and URF)
  - Action: Explore additional measures to ensure fixed income OEFs maintain sufficiently liquid assets to meet redemptions.
  - Priority: 4
  - Timeframe: Medium Term
- Recommendation 4: Liquidity Management Tools (SFC and URF)
  - Action: Change rules, laws and guidance to ensure OEF Managers have clarity regarding potential to apply LMTs.
  - Priority: 5
  - Timeframe: Medium Term
- Recommendation 5: OEF liquidity working group and development of risk appetite (cross-agency)
  - Action: Establish a cross-agency working group to assess report recommendations and establish a risk appetite concerning systemic risks posed by OEFs.
  - Priority: 1
  - Timeframe: Near Term
- Timeframe definitions:
  - Near term: < 12 months
  - Medium term: 12 to 24 months

### Key statistics and episode-specific facts from March 2020 stress episode
- During March 2020:
  - Investors withdrew COP 24.6 trillion within the month of March 2020.
  - Sector AUM decreased by around 32 percent.
  - Average OEF experienced redemptions totaling a third of fund NAV.
  - In some OEFs, redemptions reached 50 percent of fund NAV.
- Market structure observations:
  - No Colombian OEF suspended during the period reviewed by the mission team (March 2020–March 2025).
  - No sub-sector of OEF experienced net subscriptions in March 2020; unlike other jurisdictions where government MMFs attracted inflows of between 20 and 60 percent of NAV, and prime MMFs experienced outflows around 20–30 percent of NAV (in peer jurisdictions).
- Central bank intervention:
  - BanRep intervened meaningfully on March 12, 2020 (e.g., extended access to repo facilities including private debt securities).
  - BanRep data show defaults on regulatory minimums (including 1-day and 30-day liquidity) declined as BanRep measures took effect.
- OEFs’ role in bank funding:
  - Nearly 90 percent of OEF investments were composed of certificates of deposits and savings accounts.
  - These represented around 6 percent of banks’ total demand deposits.

### Introduction — mission phases and scope
- Mission phases:
  1. Initial questionnaire completed by Colombian Authorities with supporting material (January 2025).
  2. Onsite mission in March 2025 with meetings.
  3. Drafting of this report.
  4. Due diligence and IMF approval for publication between March and July, 2025.
- Scope: Strengthening resilience of OEF liquidity risk management framework; not focused on broader capital markets development.

### Regulatory authorities and legal context
- Presidential delegation:
  - The President is empowered to issue decrees, resolutions, and orders to enforce laws and intervene in securities market regulation; Article 211 of the Constitution permits delegation to ministers and superintendents.
  - Ministry of Finance authorized to regulate financial, stock market, and insurance matters; URF was established to prepare regulations for regulatory power exercise.
- URF purpose:
  - Prepare regulations for foreign exchange, monetary and credit matters, and on regulatory and intervention powers in financial, stock market, insurance; prepares regulations governing management of investment funds issued by the National Government through the Ministry of Finance.

### Regulatory mandates and institutional roles
- The SFC:
  - Functions under Article 326, numeral 3, literal (a) of the "Estatuto Orgánico del Sistema Financiero".
  - Is responsible for instructing supervised entities on compliance, establishing technical and legal criteria, outlining procedures for implementation, and guiding institutions on managing inherent risks.
  - Is the administrative authority specializing in supervision of the securities market and investment funds, issuing general guidelines on compliance, technical criteria, procedures, and risk management.
- Banco de la República (BanRep):
  - Monitors entities comprising the financial system (including OEFs) under its mandate to preserve the national currency's purchasing power, support sustained economic growth and contribute to financial stability.
  - Issues regulations concerning foreign exchange matters applicable to funds engaging in currency transactions.
  - May adopt liquidity-regulating measures (temporary/permanent liquidity provision/contraction using public and private debt securities) to contribute to financial stability.
- Financial System Coordination and Monitoring Committee (CCSSF):
  - Comprised of BanRep and the SFC.
  - Monitors systemic risks and coordinates macroprudential policies and regulatory measures to mitigate financial risks.

### OEF market structure and key statistics (as at 30 December 2024)
- Aggregate size:
  - Assets under management in Colombian OEFs amounted to COP 109.6 trillion, circa USD 27.8 billion as per exchange rates on the same date.
- Total number of OEFs: 86.
- Breakdown by type (exact figures reported):
  - Money Market Fund (“MMF”): Number of OEFs 16; AUM as at 30 December 2024 ~49 trillion COP
  - Variable-income (equity): Number of OEFs 9; AUM as at 30 December 2024 ~0.6 trillion COP
  - Fixed Income OEF (“FI-OEF”): Number of OEFs 61; AUM as at 30 December 2024 ~60 trillion COP
- Observations:
  - Low number of equity funds relative to other OEF types attributed to low investor demand for Colombian equities and a stock exchange dominated by a small number of inter-related issuers.
  - The low liquidity of domestic equities markets may be a factor.

### Portfolio composition and liquidity features
- Similarity in holdings:
  - FI-OEFs and MMFs show a strikingly similar asset mix.
  - MMFs and FI-OEFs invest over 85 percent of their holdings in certificates of deposits and demand deposits.
- Regulatory liquidity requirements (preserved exactly as presented):
  - MMFs:
    - At least 5 percent in cash
    - At least 10 percent in liquid resources (1-day liquidity)
    - At least 25 percent in 30-day liquidity.
    - At least 10 percent of NAV in HQLA
    - LRI greater than 100 percent (LRI = the ratio of assets that can be liquidated compared to maximum probable redemptions)
  - FI-OEFs:
    - No cash requirement
    - 5 percent in liquid resources
    - No 30-day liquidity requirement
    - At least 10 percent of NAV in HQLA
    - LRI greater than 100 percent
- Liquidity Risk Indicator (LRI) specifics:
  - The OEF must hold HQLA equivalent to 100 percent of either its highest potential redemption, or 10 percent of NAV (whichever figure is higher).
  - The LRI calculation uses an estimation by the OEF Manager of maximum potential redemption in one day (based on historical redemptions and with 95 percent confidence).
  - The lowest possible one-day net redemption to be taken into account is 10 percent of NAV.
  - The LRI is reported weekly (via ‘Formato 519’) to the SFC; frequency can be increased to daily when appropriate.
- Data and trends:
  - BanRep analysis: share of non-traditional investment in the total assets of the ten largest investment funds increased from 1 percent in 2023 to 9 percent in 2024.
  - The 2024 BanRep analysis noted: i) this is a recent trend (only 12 months of data); ii) liquidity levels of funds are actually higher than in 2023; and iii) OEFs were substituting in T-Bills for cash during that same period.

### Colombian capital markets context and policy implications
- Market characteristics:
  - OEFs primarily invest in Colombia-domiciled assets: equity, sovereign and corporate credit, deposits, and other OEFs.
  - Local currency government bond market: large and liquid.
  - Corporate debt markets: shallow.
- Policy implications:
  - Shallow capital markets limit regulators’ options for imposing stringent liquidity-related asset thresholds (e.g., requiring only exchange-listed assets).
  - Forcing OEFs away from less liquid domestic assets could reduce OEF demand for Colombian assets and worsen market liquidity.
  - Reforms aimed at enhancing domestic market liquidity (example cited: Decree 1239 of 2024) are under way but may be too early to assess long-term impacts.
- Recommended regulatory approach:
  - Take a gradual and proportionate approach to changes in OEF liquidity regulation, considering the generally good framework already in place and the shallowness of local capital markets.

### Supervision practices, recent legal changes, and risk implications
- Supervisory strengths:
  - Strong minimum liquidity parameters for MMFs and FI-OEFs, including 1-day and 30-day liquidity, minimum cash levels, and HQLA requirements.
  - The SFC:
    - Collects weekly liquidity-related data (with capacity to require daily reporting in heightened periods).
    - Uses data to build fund-by-fund liquidity pictures and engages with OEF Managers when liquidity deteriorates.
    - Undertakes its own liquidity stress testing of OEFs, including stress on both liabilities (redemptions) and assets (declining asset values).
  - SIAR (Comprehensive Risk Management System) requires OEF Managers to have processes ensuring strong risk management; SFC engages to ensure implementation.
- Legal change and risk:
  - In 2024, rules were amended to allow new OEFs to be established without an SFC authorization process.
  - Mitigating measures cited by authorities: self-certification of compliance by OEF Managers and an enhanced custodian monitoring role.
  - Authorization acts as an ex-ante control on design (asset mix and redemption terms); its removal increases the onus on SFC supervision and contingency measures.
  - Limited new OEF creation: SFC reported only four were authorized in 2024.

### Mission findings and principal recommendations (risk mitigation and supervisory powers)
- Key findings:
  - Regulation and supervision of OEFs are robust in many features, with areas for incremental improvement.
  - The LRI and weekly reporting are prudent and effective controls; SFC stress testing aligns with international best practice.
  - The 2024 change allowing OEF establishment without SFC authorization creates potential design and mismatch risks between redemption terms and asset liquidity.
- Principal recommendations (phrasing and triggers preserved):
  - Grant the SFC the unilateral power to suspend dealings of units in an OEF.
    - Rationale: current gap where SFC must rely on OEF Managers invoking contingency plans; Manager may fail to act or be hesitant due to reputational/business concerns. Suspension protects remaining investors from undue exposure to illiquid assets or breaches of investment restrictions.
  - Consider triggers for suspension grounded in IOSCO guidance.
    - Example trigger: repeated failure to meet LRI requirements.
    - The SFC should determine specific triggers that would prompt suspension.
  - Review applicable laws to ensure clarity that the SFC can direct an OEF to convert to a CIS with a permanence agreement (meaning significantly reduced redemption frequency) where in investors’ interests.
    - Rationale: addresses risk of funds being established with mismatched redemption terms and asset liquidity after removal of authorization requirement.
    - The SFC’s frequent liquidity reporting positions it to take such actions.
    - Complementary guidance for OEF Managers is recommended on circumstances favoring establishment as an OEF versus a CIS with a permanence agreement.
- Implementation nuance:
  - Recommendations recognize recent legal changes and advise proportionate, pragmatic measures rather than immediate reinstatement of prior authorization regimes, to preserve legal certainty.

### Liquidity stress testing (SFC and OEF Managers)
- Findings:
  - The mission found the SFC’s liquidity stress testing exercises to be "very good."
- Recommendation:
  - The SFC should specify the parameters under which OEF Managers must undertake their own liquidity stress tests, including reverse stress testing, to ensure a minimum standard is met across the market.
  - Suggested minimum standard: The SFC’s own approach to liquidity stress testing, including stress testing both the asset and liabilities side of an OEF’s balance sheet, should be the minimum standard by which OEFs adhere to applicable rules. Final determination of parameters to be made by the SFC.

### B. MMFs’ Risk Profile — findings and recommendations
- Findings:
  - Two key areas meriting regulatory reform:
    - reducing the risk profile of MMFs to make them less vulnerable to liquidity shocks; and
    - clearly distinguishing MMFs from Fixed Income OEFs to identify MMFs as vehicles primarily pursuing capital preservation and liquidity, and Fixed Income OEFs as pursuing primarily investment returns and liquidity transformation.
  - Colombia permits MMFs a weighted average maturity (WAM) of up to 365 days.
  - Regional and international comparisons:
    - Chile WAM limit: 90 days.
    - Brazil WAM limit: 60 days.
    - EU WAM limit: 60 days.
  - Colombia’s framework does not refer to a permitted weighted average life (WAL).
  - Observed practice: SFC data showed WAM levels of Colombian MMFs actually exceeded those of FI-OEFs.
  - Resulting risk profile:
    - MMFs are operating in a riskier way than FI-OEFs, despite being intended as capital preservation vehicles.
    - MMFs have disproportionately higher exposure to less-liquid, higher yielding credit instruments while maintaining required liquidity buffers.
    - Colombian MMF investments are concentrated in credit securities issued by a small number of Colombian financial institutions.
    - Sovereign credit market in Colombia is relatively deep compared to corporate credit, yet MMFs had very low exposure to sovereign credit.
- Recommendations:
  - Amend the regulatory framework to lower the risk profile of MMFs via adjustments to the WAM limit and creation of a WAL limit.
    - The mission did not model the likely impact and advocates that Colombian authorities do so when addressing these Recommendations.
    - The mission did not advocate a particular WAM or WAL limit, but recommended the WAM level be materially lower than presently permitted, while allowing for particularities of the Colombian markets.
    - Timeline for change should be gradual to avoid disruption.
  - Consider establishing different categories of MMF allowing differing levels of risk (potentially defined by WAL and WAM).
    - Note: IOSCO recommendation cited that "for the more conservative money market funds, the WAM should generally not exceed 60 days and the WAL should generally not exceed 120 days."
    - If categories are established, adopt rules regarding naming conventions to clearly differentiate them for investor protection.
  - Consider permitting MMFs to invest more than the current 5 percent maximum unhedged exposure to non-COP denominated assets.
    - Recommendation is tempered: any increase would introduce more market risk and must be justified by potential increase in liquidity from access to non-COP denominated assets.
    - Any amendment should be underpinned by thorough analysis of potential impact on the MMF market by Colombian authorities.
- Bank funding considerations:
  - Colombian OEFs, including MMFs, fund Colombian financial institutions’ liabilities to a significant extent.
  - Reforms reducing MMF vulnerabilities have in some peer cases led to more expensive cost of capital for banks and reduced share prices.
  - Potential benefit: lower-risk MMFs can substitute stability for quantity, making them less susceptible to redemption runs and less likely to liquidate assets.
  - Given the importance of MMFs to bank funding, Colombian authorities should consider the likely impact on bank funding when calibrating measures, including timing.

### C. Liquidity of FI-OEFs — findings and recommendations to explore
- Findings:
  - Liquidity strain in March 2020 impacted all Colombian OEFs including MMFs, FI-OEFs, and Equity OEFs; no OEF suspended during the reviewed period.
  - FI-OEFs: greater focus due to shallowness of capital market segments they invest in; FI-OEFs and MMFs both highly oriented to Certificates of Deposit issued by local financial institutions.
  - FI-OEFs are covered by minimum liquidity rules including the LRI requirement and minimum levels of HQLA, but these are minimums only.
- Recommendations to explore:
  - Complement LRI (a 'floor') with an explicit maximum percentage of NAV capable of being invested in illiquid assets (a 'ceiling').
    - Define both the ceiling and the meaning of 'illiquid' with reference to time to liquidation of portfolio assets.
    - Undertake analysis of asset liquidity in Colombian capital markets to help determine ceiling and definition of 'illiquid'.
    - Draft IOSCO recommendations provide guidance on definitions of liquid, less liquid and illiquid in normal and stressed market conditions.
  - Require a minimum percentage of the portfolio be made up of diversified portfolio assets (by issuer type).
    - Current legislation permits concentration in exposure to a small number of corporate debt issuers.
    - Authorities should assess scope for a minimum diversification requirement, including potential reorientation toward sovereign debt, exposure to 'nontraditional' assets, and impact on common investments between OEFs and credit institutions.
  - Require a minimum level of OEF holdings to be both liquid and listed on an applicable exchange.
    - Public listing does not denote liquidity automatically; laws currently require registration at the RNVE but not listing.
    - Caution: could incentivize reorientation away from corporate credit to listed sovereign debt; may conflict with FI-OEF prospectuses; consider carefully.
- Calibration note:
  - Enhancing FI-OEF liquidity is not as high priority as reducing MMF risk profile; absence of suspensions during review period supports lower priority. All options involve trade-offs.

### D. Liquidity Management Tools (LMTs) — findings, suggested tools, and cautions
- Findings:
  - LMTs alter redemption conditions on day-to-day or during stress; regulatory framework is silent on whether LMTs may be utilised by OEFs.
  - No Colombian CIS has included LMTs in its prospectus; possible market uncertainty about their use.
  - Regulatory clarity on available LMTs is merited.
  - LMTs are supplementary to ensuring portfolio liquidity matches liabilities; recommendations in this section are lower priority and not suggested to be mandatory.
- Suggested LMTs for Colombia:
  - Share classes with notice periods (delayed fulfilment of redemption request) targeted to investor types representing larger liquidity risk.
  - Gates (partial and temporary restrictions on redemption, generally pro-rata) to spread redemption requests and asset sales over time.
  - Minimum balance at risk (MBR) where a fraction of each investor’s shares cannot be redeemed immediately.
    - MBR is a relatively new LMT proposed by bodies such as the FSB.
    - MBR reduces first mover advantage by ensuring investors retain 'skin in the game'; is a permanent dealing feature rather than temporary like gates, and has less reputational impact.
    - As a new measure, Colombia may prefer to monitor peer implementation before adopting MBR.
- LMTs and investor expectations:
  - Inclusion of LMTs in fund prospectuses should not be forced on OEF Managers; explicit inclusion in the regulatory framework clarifies potential inclusion in OEF Managers’ toolkits.
  - OEF Managers must assess whether application of these tools is in the best interests of their clients; certain investors may prefer not to invest in OEFs which apply such tools (as noted by IOSCO regarding anti-dilution tools).
  - The SFC can encourage OEF Managers to include LMTs in prospectuses; the mission recommends that they do so (distinct from obliging utilisation).
  - Not all LMTs are suitable for all OEF types; it is questionable whether share classes with notice periods and gates should be available to MMFs.
  - Policy implication: Primary means to reduce vulnerabilities in the MMF sector should be reducing portfolio risk and increasing portfolio liquidity rather than relying on LMTs.
- Valuation adjustments and guards against abuse:
  - Current practice: OEFs are required to value assets on a mark-to-market basis using a third-party price provider.
  - Recommendation: Assess circumstances where this process may lead to overvaluation to the detriment of remaining investors and the benefit of redeeming investors.
  - Controls recommended if unilateral valuation adjustments are permitted:
    - Require correction of pricing errors (which can mean cash transfers to investors who redeemed at too low a value).
    - Consider placing a maximum ceiling on the percentage of NAV that can be marked-down.
    - Consider a maximum percentage haircut an OEF Manager can unilaterally make on an asset-by-asset basis.
  - Caution: Proceed gradually and cautiously with this regulatory change to mitigate risks from poor execution by OEF Managers.

### Interagency Liquidity Working Group and development of risk appetite
- Recommendation:
  - Establish an inter-agency working group composed of at least BanRep, the SFC, and the URF.
- Rationale:
  - Issue impacts agencies differently: BanRep (financial stability), SFC (financial services regulator and investor protection), URF (preparing and adopting regulations).
  - Trade-offs in proposals can affect agencies differently (e.g., MMF reforms can reduce investor protection risks but increase funding costs for local financial institutions).
  - Each agency brings complementary expertise: SFC collates fund holdings and monitors market impact; BanRep conducts macroeconomic and financial stability analysis; URF has legislative expertise.
- Working group remit:
  - Determine cross-agency adoption and timing of recommendations.
  - Serve as primary contact for industry interactions on regulatory changes, timing, and implementation.
  - Recognize recent material amendment of the OEF regulatory framework in 2024 and consider appropriateness/timing of further changes.
- Establishing cross-agency risk appetite:
  - Essential to determine institutional priorities and navigate inherent trade-offs in policy decisions.
  - International standards (e.g., FSB’s Principles for An Effective Risk Appetite Framework, 2013) could inform key components such as an internal risk appetite statement.
  - The mission team advises inclusion of the following matters in the cross-agency risk appetite:
    - Policy regarding BanRep’s openness towards extending repurchase agreements for OEFs regarding corporate credit.
    - Policy regarding Colombian financial institutions’ access to cheap funding from the OEF market.
    - Policy regarding growth of the Colombian OEF sector and trade-offs between promoting AUM growth and imposing regulatory burdens that may reduce product offerings or market participants.
- Communication of regulatory risk appetite:
  - Can be issue-by-issue via consultations with industry (example: UK FCA communicated FPC’s policy preference regarding MMFs in a Consultation Paper).
  - Policy change itself can signal regulatory risk appetite (e.g., global MMF reforms signaled policymakers’ view that such funds should withstand severe but plausible investor outflows).

### Conclusion and key recommendations
- Observation:
  - The mission acknowledged the overall liquidity of the Colombia OEF sector, with no fund suspensions during the period reviewed, including during extraordinary redemptions in early 2020.
- Core recommendations:
  - Materially reduce the risk that MMFs are permitted to adopt under applicable laws (Colombian MMFs are outliers regionally and globally in permitted risk and are vulnerable to redemption risk).
  - Develop a cross-agency taskforce to address this report and establish a risk appetite regarding OEF liquidity.
- Trade-off note:
  - Because of recent material changes to rules and laws in 2024, the Colombian Authorities may prefer gradual implementation; a cross-agency risk appetite will assist in navigating the trade-offs involved.

*IMF Technical Assistance Report — Preface and selected sections (tarea2025071-source-pdf).*

### Preface ................................................................................................................

### Preface

### Mission overview
- Mission dates: March 10 to March 14, 2025.
- Requesting authorities: Financial Superintendency of Colombia (SFC), Financial Regulation Unit of the Ministry of Finance and Public Credit (URF), and Banco de la República (BanRep).
- Mission team: Nick Green (external expert) and Richard Stobo (MCM).
- Mission activities:
  - Collected detailed information via questionnaire and data request.
  - Onsite meetings with Governor Villar and other senior BanRep officials, representatives of the SFC and URF, and a range of private sector market participants.

### Executive summary — key findings and analytical context
- Purpose: Assess the regulatory framework for liquidity risk management of open-ended investment funds (OEFs) and identify potential improvements.
- International context: Aligns with recent international policymaker focus, notably FSB and IOSCO, on:
  - Alignment between funds’ asset liquidity and redemption policies.
  - Role of liquidity management tools (LMTs) such as gates and deferred redemptions.
- Identified supervisory gap:
  - SFC obtains extensive data on OEF liquidity developments but lacks certain unilateral powers to operationalize interventions (e.g., unilaterally suspend dealings; direct conversion of an OEF to a CIS with permanence).
- MMF sector characterization and recommendation:
  - Colombian market is characterized as exclusively a “prime” MMF market; no “government” MMF sub-sector observed.
  - Recommended adjustments to weighted average maturity (WAM) and weighted average life (WAL) thresholds to reduce MMF risk profile in line with international standards.
  - Consider permitting MMFs to invest more than the current 5 percent maximum unhedged exposure to non-COP denominated assets to increase access to liquid foreign-currency money market instruments.
- Fixed income OEFs:
  - Although covered by strong rules on minimum liquidity (including the Liquidity Risk Indicator, LRI), additional measures are recommended:
    - Complement the LRI with an explicit maximum percentage of NAV investable in illiquid assets.
    - Require a minimum share of diversified portfolio assets by issuer type to reduce concentration in a small number of corporate debt issuers.
    - Consider requiring a minimum level of OEF holdings that are both liquid and listed on an applicable exchange to incentivize exposure to listed sovereign debt.
  - These measures are confined to fixed income OEFs; MMFs addressed separately (WAM/WAL focused).
- Liquidity Management Tools (LMTs):
  - Recommend clarifying available LMTs in rules, laws, and guidance.
  - LMTs of most benefit: share classes with notice periods, gates, and minimum balance at risk requirements.
  - Use of LMTs should augment, not substitute for, portfolio-liability alignment.
- Inter-agency coordination:
  - Recommend establishing a cross-agency working group (BanRep, SFC, URF) to assess recommendations and set a risk appetite for systemic risks posed by OEFs.
  - Working group to manage trade-offs (e.g., bank funding vs investor protection) and serve as primary contact for industry interactions on timing and implementation.

### Recommendations (Table 1 summary)
- Recommendation 1: Supervision of OEF liquidity (SFC and URF)
  - Action: Change applicable rules and laws to better enable effective supervision of OEF liquidity risk.
  - Priority: 3
  - Timeframe: Medium Term
- Recommendation 2: MMF Risk Profile (SFC and URF)
  - Action: Change applicable rules and laws to reduce risks capable of being taken by MMFs and reduce MMF sector vulnerabilities.
  - Priority: 2
  - Timeframe: Medium Term
- Recommendation 3: Liquidity of Fixed Income OEFs (SFC and URF)
  - Action: Explore additional measures to ensure fixed income OEFs maintain sufficiently liquid assets to meet redemptions.
  - Priority: 4
  - Timeframe: Medium Term
- Recommendation 4: Liquidity Management Tools (SFC and URF)
  - Action: Change rules, laws and guidance to ensure OEF Managers have clarity regarding potential to apply LMTs.
  - Priority: 5
  - Timeframe: Medium Term
- Recommendation 5: OEF liquidity working group and development of risk appetite (cross-agency)
  - Action: Establish a cross-agency working group to assess report recommendations and establish a risk appetite concerning systemic risks posed by OEFs.
  - Priority: 1
  - Timeframe: Near Term
- Timeframe definitions:
  - Near term: < 12 months
  - Medium term: 12 to 24 months

### Key statistics and episode-specific facts from March 2020 stress episode
- During March 2020:
  - Investors withdrew COP 24.6 trillion within the month of March 2020.
  - Sector AUM decreased by around 32 percent.
  - Average OEF experienced redemptions totaling a third of fund NAV.
  - In some OEFs, redemptions reached 50 percent of fund NAV.
- Market structure observations:
  - No Colombian OEF suspended during the period reviewed by the mission team (March 2020–March 2025).
  - No sub-sector of OEF experienced net subscriptions in March 2020; unlike other jurisdictions where government MMFs attracted inflows of between 20 and 60 percent of NAV, and prime MMFs experienced outflows around 20–30 percent of NAV (in peer jurisdictions).
- Central bank intervention:
  - BanRep intervened meaningfully on March 12, 2020 (e.g., extended access to repo facilities including private debt securities).
  - BanRep data show defaults on regulatory minimums (including 1-day and 30-day liquidity) declined as BanRep measures took effect.
- OEFs’ role in bank funding:
  - Nearly 90 percent of OEF investments were composed of certificates of deposits and savings accounts.
  - These represented around 6 percent of banks’ total demand deposits.

### Introduction — mission phases and scope
- Mission phases:
  1. Initial questionnaire completed by Colombian Authorities with supporting material (January 2025).
  2. Onsite mission in March 2025 with meetings.
  3. Drafting of this report.
  4. Due diligence and IMF approval for publication between March and July, 2025.
- Scope: Strengthening resilience of OEF liquidity risk management framework; not focused on broader capital markets development.

### Regulatory authorities and legal context
- Presidential delegation:
  - The President is empowered to issue decrees, resolutions, and orders to enforce laws and intervene in securities market regulation; Article 211 of the Constitution permits delegation to ministers and superintendents.
  - Ministry of Finance authorized to regulate financial, stock market, and insurance matters; URF was established to prepare regulations for regulatory power exercise.
- URF purpose:
  - Prepare regulations for foreign exchange, monetary and credit matters, and on regulatory and intervention powers in financial, stock market, insurance; prepares regulations governing management of investment funds issued by the National Government through the Ministry of Finance.

*IMF Technical Assistance Report — Preface (tarea2025071-source-pdf).*

### 10.        The President has delegated to the "Superintendencia Financiera de Colombia" (Financial

### 10.        The President has delegated to the "Superintendencia Financiera de Colombia" (Financial Superintendence of Colombia – SFC) the responsibilities of inspection, surveillance, and control over entities engaged in securities market activities, including those on the management of investment funds.

### Regulatory mandates and institutional roles
- The SFC:
  - Functions under Article 326, numeral 3, literal (a) of the "Estatuto Orgánico del Sistema Financiero".
  - Is responsible for instructing supervised entities on compliance, establishing technical and legal criteria, outlining procedures for implementation, and guiding institutions on managing inherent risks.
  - Is the administrative authority specializing in supervision of the securities market and investment funds, issuing general guidelines on compliance, technical criteria, procedures, and risk management.
- Banco de la República (BanRep):
  - Monitors entities comprising the financial system (including OEFs) under its mandate to preserve the national currency's purchasing power, support sustained economic growth and contribute to financial stability.
  - Issues regulations concerning foreign exchange matters applicable to funds engaging in currency transactions.
  - May adopt liquidity-regulating measures (temporary/permanent liquidity provision/contraction using public and private debt securities) to contribute to financial stability.
- Financial System Coordination and Monitoring Committee (CCSSF):
  - Comprised of BanRep and the SFC.
  - Monitors systemic risks and coordinates macroprudential policies and regulatory measures to mitigate financial risks.

### OEF market structure and key statistics
- Scope and definitions:
  - Collective Investment Schemes (CIS) in Colombia: Closed-Ended Funds, Open-Ended Funds, Exchange-Traded Funds (ETFs), Money Market Funds (MMFs), and Real Estate Funds.
  - OEFs (Open-Ended Funds without permanence agreements) must accept dealing in units daily, with settlement flexibility depending on portfolio asset liquidity.
  - This report covers only OEFs (CIS without permanence agreements).
- Market size and composition (exact figures as reported):
  - As at 30 December 2024, assets under management in Colombian OEFs amounted to COP 109.6 trillion, circa USD 27.8 billion as per exchange rates on the same date.
  - Total number of OEFs: 86.
  - Breakdown by type (Table 2):
    - Money Market Fund (“MMF”): Number of OEFs 16; AUM as at 30 December 2024 ~49 trillion COP
    - Variable-income (equity): Number of OEFs 9; AUM as at 30 December 2024 ~0.6 trillion COP
    - Fixed Income OEF (“FI-OEF”): Number of OEFs 61; AUM as at 30 December 2024 ~60 trillion COP
- Observations on market composition:
  - Low number of equity funds relative to other OEF types attributed to low investor demand for Colombian equities and a stock exchange dominated by a small number of inter-related issuers.
  - The low liquidity of domestic equities markets may be a factor.

### Portfolio composition and liquidity features
- Similarity in holdings:
  - FI-OEFs and MMFs show a strikingly similar asset mix.
  - MMFs and FI-OEFs invest over 85 percent of their holdings in certificates of deposits and demand deposits.
- Regulatory liquidity requirements (Table 3) — preserved exactly as presented:
  - MMFs:
    - At least 5 percent in cash
    - At least 10 percent in liquid resources (1-day liquidity)
    - At least 25 percent in 30-day liquidity.
    - At least 10 percent of NAV in HQLA
    - LRI greater than 100 percent (LRI = the ratio of assets that can be liquidated compared to maximum probable redemptions)
  - FI-OEFs:
    - No cash requirement
    - 5 percent in liquid resources
    - No 30-day liquidity requirement
    - At least 10 percent of NAV in HQLA
    - LRI greater than 100 percent
- Liquidity Risk Indicator (LRI) specifics:
  - The OEF must hold HQLA equivalent to 100 percent of either its highest potential redemption, or 10 percent of NAV (whichever figure is higher).
  - The LRI calculation uses an estimation by the OEF Manager of maximum potential redemption in one day (based on historical redemptions and with 95 percent confidence).
  - The lowest possible one-day net redemption to be taken into account is 10 percent of NAV.
  - The LRI is reported weekly (via ‘Formato 519’) to the SFC; frequency can be increased to daily when appropriate.
- Data and trends:
  - BanRep analysis: share of non-traditional investment in the total assets of the ten largest investment funds increased from 1 percent in 2023 to 9 percent in 2024.
  - The 2024 BanRep analysis noted: i) this is a recent trend (only 12 months of data); ii) liquidity levels of funds are actually higher than in 2023; and iii) OEFs were substituting in T-Bills for cash during that same period.
  - The similarity in asset mix between MMFs and FI-OEFs is likely driven by investor preferences and limited availability of other liquid instruments in domestic capital markets.

### Colombian capital markets context and policy implications
- Market characteristics:
  - OEFs primarily invest in Colombia-domiciled assets: equity, sovereign and corporate credit, deposits, and other OEFs.
  - Local currency government bond market: large and liquid.
  - Corporate debt markets: shallow.
- Policy implications:
  - Shallow capital markets limit regulators’ options for imposing stringent liquidity-related asset thresholds (e.g., requiring only exchange-listed assets).
  - Forcing OEFs away from less liquid domestic assets could reduce OEF demand for Colombian assets and worsen market liquidity.
  - Reforms aimed at enhancing domestic market liquidity (example cited: Decree 1239 of 2024) are under way but may be too early to assess long-term impacts.
- Recommended regulatory approach:
  - Take a gradual and proportionate approach to changes in OEF liquidity regulation, considering the generally good framework already in place and the shallowness of local capital markets.

### Supervision practices, recent legal changes, and risk implications
- Supervisory strengths:
  - Strong minimum liquidity parameters for MMFs and FI-OEFs, including 1-day and 30-day liquidity, minimum cash levels, and HQLA requirements.
  - The SFC:
    - Collects weekly liquidity-related data (with capacity to require daily reporting in heightened periods).
    - Uses data to build fund-by-fund liquidity pictures and engages with OEF Managers when liquidity deteriorates.
    - Undertakes its own liquidity stress testing of OEFs, including stress on both liabilities (redemptions) and assets (declining asset values).
  - SIAR (Comprehensive Risk Management System) requires OEF Managers to have processes ensuring strong risk management; SFC engages to ensure implementation.
- Legal change and risk:
  - In 2024, rules were amended to allow new OEFs to be established without an SFC authorization process.
  - Mitigating measures cited by authorities: self-certification of compliance by OEF Managers and an enhanced custodian monitoring role.
  - Authorization acts as an ex-ante control on design (asset mix and redemption terms); its removal increases the onus on SFC supervision and contingency measures.
  - Limited new OEF creation: SFC reported only four were authorized in 2024.

### Mission findings and recommendations (risk mitigation and supervisory powers)
- Key findings:
  - Regulation and supervision of OEFs are robust in many features, with areas for incremental improvement.
  - The LRI and weekly reporting are prudent and effective controls; SFC stress testing aligns with international best practice.
  - The 2024 change allowing OEF establishment without SFC authorization creates potential design and mismatch risks between redemption terms and asset liquidity.
- Principal recommendations (preserve phrasing and triggers described):
  - Grant the SFC the unilateral power to suspend dealings of units in an OEF.
    - Rationale: current gap where SFC must rely on OEF Managers invoking contingency plans; Manager may fail to act or be hesitant due to reputational/business concerns. Suspension protects remaining investors from undue exposure to illiquid assets or breaches of investment restrictions.
  - Consider triggers for suspension grounded in IOSCO guidance.
    - Example trigger: repeated failure to meet LRI requirements.
    - The SFC should determine specific triggers that would prompt suspension.
  - Review applicable laws to ensure clarity that the SFC can direct an OEF to convert to a CIS with a permanence agreement (meaning significantly reduced redemption frequency) where in investors’ interests.
    - Rationale: addresses risk of funds being established with mismatched redemption terms and asset liquidity after removal of authorization requirement.
    - The SFC’s frequent liquidity reporting positions it to take such actions.
    - Complementary guidance for OEF Managers is recommended on circumstances favoring establishment as an OEF versus a CIS with a permanence agreement.
- Implementation nuance:
  - Recommendations recognize recent legal changes and advise proportionate, pragmatic measures rather than immediate reinstatement of prior authorization regimes, to preserve legal certainty.

*IMF Technical Assistance Report*

### 31.        The final recommendation relates to the SFC’s liquidity stress testing exercises, which the

### tarea2025071-source-pdf - 31.        The final recommendation relates to the SFC’s liquidity stress testing exercises, which the

### Liquidity stress testing (SFC and OEF Managers)
- The mission found the SFC’s liquidity stress testing exercises to be "very good."
- Recommendation: The SFC should specify the parameters under which OEF Managers must undertake their own liquidity stress tests, including reverse stress testing, to ensure a minimum standard is met across the market.
- Suggested minimum standard: The SFC’s own approach to liquidity stress testing, including stress testing both the asset and liabilities side of an OEF’s balance sheet, should be the minimum standard by which OEFs adhere to applicable rules. Final determination of parameters to be made by the SFC.

### B. MMFs’ Risk Profile — Findings
- Two key areas meriting regulatory reform:
  - reducing the risk profile of MMFs to make them less vulnerable to liquidity shocks; and
  - clearly distinguishing MMFs from Fixed Income OEFs to identify MMFs as vehicles primarily pursuing capital preservation and liquidity, and Fixed Income OEFs as pursuing primarily investment returns and liquidity transformation.
- Colombia permits MMFs a weighted average maturity (WAM) of up to 365 days.
- Regional and international comparisons:
  - Chile WAM limit: 90 days.
  - Brazil WAM limit: 60 days.
  - EU WAM limit: 60 days.
- Colombia’s framework does not refer to a permitted weighted average life (WAL).
  - WAL measures weighted average of the remaining life (maturity) of each security and is used to measure credit risk and liquidity risk.
  - IOSCO advocates both WAM and WAL limits within regulatory frameworks for MMFs.
- Observed practice: SFC data showed WAM levels of Colombian MMFs actually exceeded those of FI-OEFs.
- Resulting risk profile:
  - MMFs are operating in a riskier way than FI-OEFs, despite being intended as capital preservation vehicles.
  - MMFs have disproportionately higher exposure to less-liquid, higher yielding credit instruments while maintaining required liquidity buffers.
  - Colombian MMF investments are concentrated in credit securities issued by a small number of Colombian financial institutions.
  - Sovereign credit market in Colombia is relatively deep compared to corporate credit, yet MMFs had very low exposure to sovereign credit.
  - The concentration and exposure profile accentuates vulnerability to herding behavior in shallower, riskier markets.

### B. MMFs’ Risk Profile — Recommendations
- Amend the regulatory framework to lower the risk profile of MMFs via adjustments to the WAM limit and creation of a WAL limit.
  - The mission did not model the likely impact and advocates that Colombian authorities do so when addressing these Recommendations.
  - The mission did not advocate a particular WAM or WAL limit, but recommended the WAM level be materially lower than presently permitted, while allowing for particularities of the Colombian markets.
  - Timeline for change should be gradual to avoid disruption.
- Consider establishing different categories of MMF allowing differing levels of risk (potentially defined by WAL and WAM).
  - This permits investors seeking stability to use lower-risk options and allows higher-yield-seeking MMFs to convert to a higher-yielding category.
  - Note: IOSCO recommendation cited that "for the more conservative money market funds, the WAM should generally not exceed 60 days and the WAL should generally not exceed 120 days."
  - If categories are established, adopt rules regarding naming conventions to clearly differentiate them for investor protection.
- Consider permitting MMFs to invest more than the current 5 percent maximum unhedged exposure to non-COP denominated assets.
  - Recommendation is tempered: any increase would introduce more market risk and must be justified by potential increase in liquidity from access to non-COP denominated assets.
  - Any amendment should be underpinned by thorough analysis of potential impact on the MMF market by Colombian authorities.

### Bank funding considerations
- Colombian OEFs, including MMFs, fund Colombian financial institutions’ liabilities to a significant extent.
- Reforms reducing MMF vulnerabilities have in some peer cases led to more expensive cost of capital for banks and reduced share prices.
- Potential benefit: lower-risk MMFs can substitute stability for quantity, making them less susceptible to redemption runs and less likely to liquidate assets.
- Given the importance of MMFs to bank funding, Colombian authorities should consider the likely impact on bank funding when calibrating measures, including timing.

### C. Liquidity of FI-OEFs — Findings
- Liquidity strain in March 2020 impacted all Colombian OEFs including MMFs, FI-OEFs, and Equity OEFs; no OEF suspended during the reviewed period.
- Equity OEFs: no material concerns regarding ability to meet redemptions.
- FI-OEFs: greater focus due to shallowness of capital market segments they invest in; FI-OEFs and MMFs both highly oriented to Certificates of Deposit issued by local financial institutions.
- FI-OEFs are covered by minimum liquidity rules including the LRI requirement and minimum levels of HQLA, but these are minimums only.

### C. Liquidity of FI-OEFs — Recommendations to explore
- Complement LRI (a 'floor') with an explicit maximum percentage of NAV capable of being invested in illiquid assets (a 'ceiling').
  - Define both the ceiling and the meaning of 'illiquid' with reference to time to liquidation of portfolio assets.
  - Undertake analysis of asset liquidity in Colombian capital markets to help determine ceiling and definition of 'illiquid'.
  - Draft IOSCO recommendations provide guidance on definitions of liquid, less liquid and illiquid in normal and stressed market conditions.
- Require a minimum percentage of the portfolio be made up of diversified portfolio assets (by issuer type).
  - Current legislation permits concentration in exposure to a small number of corporate debt issuers.
  - Authorities should assess scope for a minimum diversification requirement, including potential reorientation toward sovereign debt, exposure to 'nontraditional' assets, and impact on common investments between OEFs and credit institutions.
- Require a minimum level of OEF holdings to be both liquid and listed on an applicable exchange.
  - Public listing does not denote liquidity automatically; laws currently require registration at the RNVE but not listing.
  - Caution: could incentivize reorientation away from corporate credit to listed sovereign debt; may conflict with FI-OEF prospectuses; consider carefully.

- Calibration note: Enhancing FI-OEF liquidity is not as high priority as reducing MMF risk profile; absence of suspensions during review period supports lower priority. All options involve trade-offs.

### D. Liquidity Management Tools (LMTs) — Findings
- LMTs alter redemption conditions on day-to-day or during stress; regulatory framework is silent on whether LMTs may be utilised by OEFs.
- No Colombian CIS has included LMTs in its prospectus; possible market uncertainty about their use.
- Regulatory clarity on available LMTs is merited.
- LMTs are supplementary to ensuring portfolio liquidity matches liabilities; recommendations in this section are lower priority and not suggested to be mandatory.

### D. Liquidity Management Tools (LMTs) — Suggested LMTs for Colombia
- Share classes with notice periods (delayed fulfilment of redemption request) targeted to investor types representing larger liquidity risk; allows retail investors confidence in access while requiring large institutional investors to provide notice.
- Gates (partial and temporary restrictions on redemption, generally pro-rata) to spread redemption requests and asset sales over time; can signal declining liquidity and have reputational costs; useful to avoid suspending a CIS.
- Minimum balance at risk (MBR) where a fraction of each investor’s shares cannot be redeemed immediately.
  - MBR is a relatively new LMT proposed by bodies such as the FSB.
  - MBR reduces first mover advantage by ensuring investors retain 'skin in the game'; is a permanent dealing feature rather than temporary like gates, and has less reputational impact.
  - As a new measure, Colombia may prefer to monitor peer implementation before adopting MBR.

_Italic: IMF Technical Assistance Report | 20–25 (excerpts provided)._

### 51.        It is important to manage expectations regarding the likely impact of these tools on OEF

### It is important to manage expectations regarding the likely impact of these tools on OEF liquidity

### Liquidity management tools (LMTs) and investor expectations
- Inclusion of LMTs in fund prospectuses should not be forced on OEF Managers; explicit inclusion in the regulatory framework clarifies potential inclusion in OEF Managers’ toolkits.
- OEF Managers must assess whether application of these tools is in the best interests of their clients; certain investors may prefer not to invest in OEFs which apply such tools (as noted by IOSCO regarding anti-dilution tools).
- Example: In Colombian OEFs, some investors may perceive share classes with notice periods as akin to a CIS with permanence and therefore refrain from investing—illustrating why LMTs cannot be the primary tool to address liquidity in an OEF.
- The SFC can encourage OEF Managers to include LMTs in prospectuses; the mission recommends that they do so (distinct from obliging utilisation).
- Recent removal of the requirement for the SFC to authorize a fund prior to its establishment limits the ability to require LMTs as a pre-condition of authorization; alternative approaches suggested include increased monitoring, post-implementation reviews, regulatory/supervisory guidance, and industry interaction.
- The mission suggests engagement with regional peers (e.g., Inter-American Regional Committee, Growth and Emerging Markets Committee of IOSCO) to learn from experience implementing regulatory frameworks for LMTs.

### Suitability of specific LMTs and MMF considerations
- Not all LMTs are suitable for all OEF types; it is questionable whether share classes with notice periods and gates should be available to MMFs.
- Rationale: The credibility and integrity of the MMF ecosystem rests largely on the ability to redeem upon demand; MMFs differ from other OEFs because investors accept market risk and maturity transformation in the latter.
- Policy implication: Primary means to reduce vulnerabilities in the MMF sector should be reducing portfolio risk and increasing portfolio liquidity rather than relying on LMTs.
- Minimum balance at risk is a novel LMT; its acceptability to investors in MMFs, in particular, remains uncertain.

### Valuation adjustments and guards against abuse
- Current practice: OEFs are required to value assets on a mark-to-market basis using a third-party price provider; this can become challenging in stressed conditions and in markets with shallow liquidity (e.g., corporate debt markets where majority of Colombian OEFs invest).
- Issue identified: Third-party providers may make subjective assessments based on last traded prices; OEF Managers may challenge provided figures.
- Recommendation: Assess circumstances where this process may lead to overvaluation to the detriment of remaining investors and the benefit of redeeming investors (example: new and material uncertainty regarding an issuer’s creditworthiness may not manifest in traded values due to shallow markets).
- Rationale: Overvaluation creates first mover advantage and incentives to redeem, draining liquidity from an OEF; allowing OEF Managers to mark down valuations in limited circumstances can mitigate these incentives.
- Controls recommended to prevent abuse if unilateral valuation adjustments are permitted:
  - Require correction of pricing errors (which can mean cash transfers to investors who redeemed at too low a value).
  - Consider placing a maximum ceiling on the percentage of NAV that can be marked-down.
  - Consider a maximum percentage haircut an OEF Manager can unilaterally make on an asset-by-asset basis.
- Caution: Proceed gradually and cautiously with this regulatory change to mitigate risks from poor execution by OEF Managers.

### Interagency Liquidity Working Group and development of risk appetite
- Recommendation: Establish an inter-agency working group to address the recommendations in this paper, composed of at least BanRep, the SFC, and the URF.
- Rationale for inter-agency approach:
  - Issue impacts agencies differently: BanRep (financial stability), SFC (financial services regulator and investor protection), URF (preparing and adopting regulations).
  - Trade-offs in proposals can affect agencies differently (e.g., MMF reforms can reduce investor protection risks but increase funding costs for local financial institutions).
  - Each agency brings complementary expertise: SFC collates fund holdings and monitors market impact; BanRep conducts macroeconomic and financial stability analysis; URF has legislative expertise.
- Working group remit:
  - Determine cross-agency adoption and timing of recommendations.
  - Serve as primary contact for industry interactions on regulatory changes, timing, and implementation.
  - Recognize recent material amendment of the OEF regulatory framework in 2024 and consider appropriateness/timing of further changes.
- Establishing cross-agency risk appetite:
  - Essential to determine institutional priorities and navigate inherent trade-offs in policy decisions.
  - International standards (e.g., FSB’s Principles for An Effective Risk Appetite Framework, 2013) could inform key components such as an internal risk appetite statement.
  - The mission team advises inclusion of the following matters in the cross-agency risk appetite:
    - Policy regarding BanRep’s openness towards extending repurchase agreements for OEFs regarding corporate credit (noting BanRep’s repo extension from sovereign to corporate debt was material in providing liquidity during the March 2020 squeeze and concerns about moral hazard and subjective crisis definitions).
    - Policy regarding Colombian financial institutions’ access to cheap funding from the OEF market (local capital markets are not deep; issuers are principally local financial institutions; derisking MMFs can raise cost of capital for some financial institutions).
    - Policy regarding growth of the Colombian OEF sector and trade-offs between promoting AUM growth and imposing regulatory burdens that may reduce product offerings or market participants.
- Communication of regulatory risk appetite:
  - Can be issue-by-issue via consultations with industry (example: UK FCA communicated FPC’s policy preference regarding MMFs in a Consultation Paper).
  - Policy change itself can signal regulatory risk appetite (e.g., global MMF reforms signaled policymakers’ view that such funds should withstand severe but plausible investor outflows).

### Conclusion and key recommendations
- Observation: The mission acknowledged the overall liquidity of the Colombia OEF sector, with no fund suspensions during the period reviewed, including during extraordinary redemptions in early 2020.
- The mission makes a number of recommendations focused on adding resilience to the OEF sector and strengthening supervision by the Colombian Authorities to reduce vulnerabilities regarding liquidity in MMFs and the wider OEF sector.
- Number of recommendations: five recommendations are made across a range of issues.
- Most significant recommendations:
  - Materially reduce the risk that MMFs are permitted to adopt under applicable laws (Colombian MMFs are outliers regionally and globally in permitted risk and are vulnerable to redemption risk).
  - Develop a cross-agency taskforce to address this report and establish a risk appetite regarding OEF liquidity.
- Trade-off note: Because of recent material changes to rules and laws in 2024, the Colombian Authorities may prefer gradual implementation; a cross-agency risk appetite will assist in navigating the trade-offs involved.

*IMF Technical Assistance Report (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025071-source-pdf.pdf_