Singapore

Liquidity risk management practices for fund management companies

On 16 August 2018, MAS issued the Guideline No. SFA04-G08 “Guidelines on Liquidity Risk Management Practices for Fund Management Companies”. This new guideline aims to provide guidance to Fund Management Companies (“FMCs”) on sound liquidity risk management practices with respect to the management of Collective Investment Schemes (“CIS”) and is applicable to Licensed FMCs and Registered FMCs except for holders of a capital markets services license for REIT management.

Effective liquidity risk management of CIS is important to mitigate potential mismatches between the liquidity of the CIS’ underlying assets and the redemption terms under which the CIS is offered to investors. It minimises the risk where FMCs are unable to meet investors’ redemption requests in an orderly manner, and seeks to ensure fair treatment of investors, including those who have not made redemption requests.

 

THE PRINCIPLES

MAS recognises the heterogeneity in the business models of FMCs and the fund structures that they employ. Therefore, each FMC should consider how best to apply and adopt the guideline, taking into account the size, scale, complexity of its business and the profile of the funds that they manage. For instance, FMC without discretionary authority for the CIS, such as FMCs which provide research or advice to another FMC, may not apply the guideline to the extent that FMCs with discretionary authority for the CIS would. In overall, these are the principles that FMCs should take note.

Relevance

Liquidity risk management practices to be put in place shall be relevant at any time. This means that the evaluation of liquidity risk should begin at product design stage and FMCs should consider whether the CIS’ dealing (subscriptions and redemptions) are aligned with investors’ expectations, investment strategy and the liquidity profile of the underlying assets. An ongoing evaluation shall be made during the CIS’ lifecycle where changes to underlying assumptions (based on historical information and future liquidity demands) and their implication on the choices of liquidity risk management tools are accommodated. FMCs should also be proactive in considering contingency plans which commensurate the liquidity risks inherent in the CIS. To the extent practicable, FMCs are strongly encouraged to perform regular stress test under multiple scenarios to complement its liquidity risk management tools.

Governance

The guideline requires liquidity risk management practices to be an integral part of the FMCs overall risk management process and therefore it must be supported by sound governance, which covers identification, responding, and monitoring of liquidity risk. In this regard, the Board of an FMC should ensure that it has a liquidity risk management function and subject it to effective oversight. The function should have clear responsibility and accountability, sufficient stature to discharge their duties effectively, and direct access to the Board to highlight any concerns or issues. Proper and adequate documentations over the policies and procedures, including reasons for the sections of this guideline that FMCs have assessed not to apply in their context, shall be maintained.

Fairness

It is important for FMCs to meet redemption requests at any time, in a transparent, fair and orderly manner. To this end, FMCs should exercise judgement in the interest of investors in selecting liquidity management tools which aims at fair treatment to all investors, including those who remain invested in the CIS. Fair treatment to investors includes:

  • Clear and simple to understand disclosures in the CIS offering documents regarding its liquidity management general approach and its implication to investors’ redemption rights

  • Selection of appropriate tools as they become necessary, such as suspension of redemptions (during which FMC should not accept new subscriptions)

Read in detail here.

 

How can RSM Risk Advisory help?

As with all new guidelines regulations, the practical implications for the different types of FMCs may not be fully appreciated and many more questions would be raised. However, it is clear that FMCs will need to spend more time and resources in ensuring compliance with and seeking clarification for the new Liquidity Risk Management Guideline. The directors and CEOs will also have to take greater responsibility and accountability. We thus recommend that we are engaged early to work out the possible solutions in regulatory compliance advisory and risk management, which may include:

  • Evaluation of liquidity risk exposure

  • Incorporating the LRM policies into existing risk management manual

  • Response and remediation assessment

  • Internal controls and compliance attestation

We believe we have the expertise and experience to assist you and share our expertise to free up your time and resources to comply with these new requirements.

 

SPEAK TO OUR EXPERTS:

Chow Khen Seng, Partner & Industry Lead,
Financial Services

T +65 6715 1388
chowkhenseng@RSMSingapore.sg

Dennis Lee, Partner, Risk Advisory &
Deputy Industry Lead, Financial Services

T +65 6594 7627
dennislee@RSMSingapore.sg

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