MAS Raises Focus on Fund Liquidity Risk Practices

MAS wants funds to increase the frequency of liquidity risk monitoring and to extend reporting of significant redemptions to non-retail funds.

The Covid-19 crisis has exposed vulnerabilities in the world economy, highlighted the risks of climate change, and provided timely reminders for building resilience to global risks, said MAS (Monetary Authority of Singapore) Executive Director Tan Keng Heng.

Speaking at the 7th Regulatory/ Legal Roundup Forum, hosted by IMAS (Investment Management Association of Singapore) on Friday (28 May), he highlighted the need for fund managers to build portfolio resilience to liquidity risk.

Ongoing market uncertainties and the threat of renewed waves of Covid-19 derailing the global recovery, have underscored the need to monitor and manage liquidity risk prudently, particularly for funds with daily dealing arrangements, and those that invest in less liquid assets, Tan said.

MAS is working to enhance fund monitoring and surveillance efforts, to ensure early warning of significant fund outflows and potential impacts to investors.

According to Tan, MAS is looking to extend the reporting of significant redemptions beyond authorised schemes to non-retail funds, amid concerns that disorderly liquidations could have reputational impacts on fund managers or spill over to other firms.

Currently, only authorised retail fund schemes are required to notify MAS when fund redemptions exceed 5 percent of total AUM in any given dealing day. Since April 2020, more than 100 such reports have been filed with MAS.

MAS will also standardise the reporting of fund gating and suspensions via a ‘Fund Gating and Suspension Report’. “This will facilitate a consistent set of information for monitoring,” Tan said.

“As gating and suspensions restrict investors’ access to capital, this report aims to size up the impact to investors, taking into account steps taken by fund managers to safeguard their interests.”

Tan said fund managers should consider the use of swing pricing during periods of higher redemption volumes, taking into account their ability to ensure equitable treatment of investors, including those who remain invested in the fund.

In addition, he highlighted the potential for credit deterioration and rating downgrades to have further impacts on fund liquidity, forcing asset sales and aggravating stresses in the fixed income markets.

“Fund managers should assess if pre-emptive position resizing may be necessary to mitigate the impact of credit deterioration on their portfolios, especially if investment mandates afford limited flexibility to hold non-investment grade securities,” Tan said.

In addition, closer attention should be paid to funds with significant holdings of level 2 and 3 assets, which are considered less liquid, particularly daily dealing funds that are inherently exposed to greater risks of asset-liability mismatches.

Tan said MAS has commenced a liquidity risk management and valuation thematic inspection of selected fund managers.

So far, the inspection has found that fund managers have generally considered liquidity risk at the product design stage and ensured that dealing frequency took into account the liquidity profile of the underlying investments.

However, it has also identified that improvement is needed by firms to adjust proprietary or third-party liquidity risk models to account for last year’s market dislocation, and to increase the frequency of liquidity risk monitoring.

“The ability to increase the frequency of monitoring will be important for more proactive management of liquidity risk in times of stress,” Tan said, adding that MAS will share additional observations when the thematic inspections are complete.

Tan also called on fund managers to continue to prepare for the environment risk guidelines, which are due to come into effect from June 2022. In addition, firms need to continue to prepare for LIBOR transition, in terms of staff, systems and processes.

“Not all [fund managers] have completed their stocktake of the fallback arrangements for their legacy LIBOR and SOR contracts,” Tan said. “Some fund managers are also largely reliant on counterparties to determine the alternative reference rates, with a number adopting a passive ‘wait and see’ approach.”

“This mindset needs to change and fund managers should take a more proactive approach to avoid contract frustration and settlement issues.”

He also highlighted the need to put in place adequate communication plans to ensure investors are provided appropriate information on how the transition will impact the way funds are managed and performance fees are computed.

Tan also spoke of the need for fund managers’ operations to be “pandemic-resilient”, given the global shift to remote and hybrid work arrangements.

This includes enhanced monitoring of remote working risks, including risks associated with third-party vendors, cyber risk, and access to applications, systems and data by staff who are working from home.

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