On 26 October 2017, the Monetary Authority of Singapore (MAS) issued a consultation paper, proposing to introduce a liquidity risk management framework for Singapore fund managers with respect to collective investment schemes (CIS) that they manage (Consultation Paper).
MAS proposes to: (a) issue a new set of guidelines implementing the proposed liquidity risk management framework (LRM Guidelines); and (b) impose additional portfolio requirements for money market funds (MMF).
A summary of the proposals is set out below.
All capital markets services licence holders for fund management (both retail and non-retail fund managers) and registered fund management companies (collectively Regulated FMCs) will need to adhere to the LRM Guidelines when managing open-ended funds. The LRM Guidelines are intended to supplement the existing statutory requirement1 for fund managers to implement risk management frameworks to identify, address and monitor risks associated with asset sunder management.
The LRM Guidelines are meant to be applied on a proportionate basis commensurate to the Regulated FMCs' role that they undertake for the funds. Consequently, managers are required to adhere to the LRM Guidelines. Submanagers with delegated authority to manage a portion of the funds' portfolio are expected to assess and adopt the LRM Guidelines to the extent possible, taking into account the liquidity risk management policies of the main manager. The LRM Guidelines will be less relevant for sub-advisers who provide research and non-discretionary advice only.
The LRM Guidelines will also be encapsulated in the Code of Collective Investment Scheme (CIS Code), where fund managers of authorised schemes will be required under Chapter 3 of the CIS Code to assess and adopt the LRM Guidelines.
For Regulated FMCs managing closed-end funds, MAS has indicated that while liquidity risk management may be less critical, Regulated FMCs should be mindful of liquidity issues which may arise at the point of termination of the fund or divestment of the fund's assets.
Key areas covered in the LRM Guidelines
The LRM Guidelines set out the following four key concepts:
- Governance: Board and senior management will be responsible for ensuring that the firm has a liquidity risk management function that is subject to effective oversight, and that liquidity risk management forms an integral part of the firm's broader risk management process.
Regulated FMCs that manage retail funds with daily dealing are expected to have in place dedicated risk management function whose oversight include liquidity risk that is independent of the portfolio management function. Regulated FMCs with smaller set ups or those managing funds with less frequent dealing and/or only offered to accredited or institutional investors are minimally expected to designate a senior staff to be responsible for liquidity risk management.
- Initial design of product: Regulated FMCs should evaluate liquidity risks and identify arrangements to set the foundation for effective liquidity risk management at the product design stage. Dealing frequency and arrangement should be aligned with the fund's investment strategy and the liquidity profile of underlying assets.
Regulated FMCs should also take steps to understand the distribution channels and the investor profile and concentration (e.g. consider investors' historical and expected redemption patterns), and assess how this may affect liquidity.
Activation of any liquidity management tools (e.g. suspension of redemptions, redemption gates and swing pricing) should only be used where fair treatment of investors is not compromised. There should be clear and simple-to-understand disclosures to investors on when such tools may be activated.
- Ongoing liquidity risk management: Regulated FMCs are required to monitor and manage the funds' liquidity risks on an ongoing basis so that they are able to anticipate or identify an emerging liquidity issue before it occurs, and take steps to minimise investor detriment.
- Stress testing: Regulated FMCs should satisfy themsleves that their CIS can withstand liquidity stresses during market disruptions. Therefore, regular stress testing should be conducted based on historical market conditions and forward looking hypothetical situations.
Further details of the LRM Guidelines are set out in Annex B to the Consultation Paper.
Additional requirements for MMF
MAS proposes to amend the CIS Code to require MMFs that are authorised schemes to: (a) hold a minimum amount of liquid assets to limit asset-liability mismatches and strengthen their ability to meet redemptions; and (b) impose additional portfolio weighted average maturity (WAM) requirements on an MMF.
Minimum liquid asset holdings
A MMF (including short-term MMF) should invest:
- at least 10% of its net asset value ("NAV") in daily maturing liquid assets, such as cash or securities that will mature or are exercisable and payable within one business day; and
- at least 20% of its NAV in weekly maturing liquid assets, such as cash or securities that will mature or are exercisable and payable within five business days.
Portfolio weighted average maturity
A short-term MMF should maintain a portfolio weighted average maturity that does not exceed 60 calendar days.
A MMF should maintain a portfolio WAM that does not exceed six months.
Implementation date and transition
MAS proposes to issue the LRM Guidelines and changes to the CIS Code in the first quarter of 2018, and provide a transitional period of three months for Regulated FMCs to assess and adopt the requirements.
Regulated FMCs are encouraged to engage MAS as they implement and/or enhance their liquidity risk management framework. MAS will adopt a consultative approach at the start to assessing an FMC's level of compliance and adequacy of liquidity risk management processes.
MAS is currently seeking public feedback on the proposals. The public consultation period will end on 27 November 2017. If you have any questions or would like to submit any comments to the MAS through us, please do not hesitate to contact us.
1Regulation 13(B)(1) of the Securities and Futures (Licensing and Conduct of Business) Regulations