MAS sets liquidity risk management expectations

10 November 2023 | Asia | Articles

Following a series of thematic inspections of Fund Management Companies, the MAS has released an information paper setting out its expectations around liquidity risk management. The MAS notes areas where improvements should be made – including in senior management oversight of liquidity risk, monitoring and management of liquidity risk throughout product life cycles, and stress-testing.

The MAS released its Information Paper on the 12th October in which it set out its supervisory expectations of effective liquidity risk management (LRM) by Fund Management Companies (FMCs). The MAS first issued Guidelines on sound LRM practices for FMCs in August 2018. Following a series of thematic inspections and prospectus reviews of FMCs, the regulator is now laying out the general practices and areas of improvement it observed while reiterating its expectations for FMCs.
In the Paper, the MAS said FMCs generally have put in place adequate LRM frameworks and practices that are commensurate with the size, scale and complexity of their businesses and the risk profiles of the collective investment schemes that they managed. But MAS also notes areas where improvements should be made, such as enhancing senior management oversight of liquidity risk and the FMC’s monitoring and management of liquidity risk throughout the entire product life cycle.
The principles apply to FMCs that manage both retail and non-retail funds and, whilst they are likely to have a greater impact on open-ended funds, they are still relevant to those that are closed-ended. The Paper gives a useful insight into the approach of a variety of FMCs across the market as well as the MAS’s expectations. Reviewing your LRM framework for any gaps and improvements against the findings would be time well spent.

Governance

• Board and senior management responsibility: There should be clear responsibility and accountability for the FMC’s Board and senior management to ensure the effective implementation of LRM. They must be kept updated on liquidity risk matters.
• Independent LRM personnel: Key individuals responsible for LRM should be independent from the front office and have sufficient authority to discharge their duties effectively.
• Adequate escalation: FMCs should establish escalation procedures enabling key individuals to highlight liquidity issues or concerns and take corresponding mitigating actions on a timely basis.
• Policies and procedures: these should be in place to guide staff on monitoring and managing liquidity risks and must be reviewed regularly to assess their effectiveness.

New product approval

• Liquidity risk evaluation: Liquidity risks should be considered during product design, taking into account factors such as investment strategy and objectives, liquidity profile of underlying assets, investor expectations, redemption terms, LRM tools and disclosure to investors.
• Liquidity risk monitoring: FMCs should implement proper systems, processes and tools to monitor liquidity risks. These should be regularly reviewed to assess their effectiveness, and the assessments and decisions should be properly documented.
• Disclosure to investors: FMCs should provide proper disclosure to investors on the usage of LRM tools.

Ongoing liquidity risk management

• Liquidity profile monitoring: FMCs should implement systems and processes to measure changes in the liquidity profile and the ability of the fund to meet redemption requests.
• Review of liquidity models: FMCs should regularly review models used to measure the liquidity profile of the fund to ensure accuracy.

Stress testing

• Timely stress testing: FMCs should assess the ability of the fund to withstand liquidity stress via stress testing.
• Review of assumptions: FMCs should regularly review stress test assumptions to ensure reliability.
• Execution: Stress factors should be applied to all assets held by the fund during the testing exercise. The use of historical test scenarios and proxies should be appropriate to the profile of the fund being tested on

How we can help

Our team in Singapore provides regulatory and compliance support to FMCs in meeting MAS requirements regarding various regulatory themes, including liquidity risk management.

Make sure your compliance frameworks are fit for purpose by getting in touch.