A series of briefings that take a "bite-size" look at international trends in different jurisdictions, drawing on Baker McKenzie's expert financial services practitioners.
Liquidity Stress Testing for Funds
This edition takes a bite-size look at liquidity stress testing for funds in Hong Kong, Thailand, Singapore, United Kingdom, Australia and the United States, focusing on investment management centres.
Open-ended investment funds which issue new units to customers and redeem existing units on demand can experience liquidity mis-matches when the underlying assets in which a fund invests take longer to liquidate, for example, in the case of high yield bonds. Another instance is where the value of underlying assets i.e., the net asset value (or NAV) is uncertain and so, therefore, the value of individual units. In an economic environment where rates of return on many conventional asset classes can be low, the "reach for yield" can increase the risk of a "mismatch" between the liquidity of underlying assets and investor expectations over the ease of redemption. For this reason, regulators globally are placing increased importance on ensuring that liquidity is appropriately managed with adequate tools, but avoiding as the International Organization of Securities Commissions (IOSCO) says (see statement) a "one-size fits all" approach, recognising that funds vary in nature and the characteristics of asset classes are always changing.