Proposed Guidelines on liquidity risk management for fund management companies

The Monetary Authority of Singapore is proposing to introduce a liquidity risk management framework for fund managers with respect to the open-ended funds they manage.

The Monetary Authority of Singapore (MAS) issued a consultation paper on 26 October 2017 proposing to introduce a liquidity risk management framework for fund management companies (FMCs) with respect to the collective investment schemes (CIS) which they manage. This new framework is set to be introduced in the form of guidelines (Guidelines). The MAS also proposes to amend the Code on Collective Investment Schemes (CIS Code) to address liquidity risk in money market funds by introducing additional portfolio requirements.

The Guidelines, when effective, will apply to licensed FMCs which hold a capital markets services licence for fund management, as well as registered FMCs (which are registered under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations), which are responsible for the portfolio management of open-ended CIS.

The public consultation can be found here.

Proposed Guidelines

Some of the key areas covered in the proposed Guidelines include:

(a) Governance: The liquidity risk management process must be an integral part of a FMC’s broader risk management process. A FMC’s liquidity risk management process must be supported by strong and effective governance, and accordingly, the board and senior management of the FMC should ensure the FMC has a liquidity risk management function, and subject it to effective oversight.

(b) Initial design of product: The evaluation of liquidity risks that the CIS may face throughout its life cycle and the implementation of arrangements to set the foundation for effective liquidity risk management should begin at the product design stage. FMCs should consider whether the CIS’ dealing (subscriptions and redemptions) arrangements are aligned with its investment strategy and liquidity profile of the underlying assets. FMCs also should consider the appropriateness of liquidity management tools or exceptional measures that the CIS may use when faced with a liquidity problem. Liquidity management tools should only be used where fair treatment of investors is not compromised.

(c) Ongoing liquidity risk management: FMCs are expected to monitor and manage the liquidity risk in the CIS post-launch, including ongoing monitoring of investors’ profile and redemption patterns and conducting regular assessments on the liquidity profile of the CIS’ liabilities and assets.

(d) Stress testing: FMCs should complement their liquidity risk management tools with regular stress testing. A FMC should satisfy itself that its CIS can withstand liquidity stresses during market disruptions. As such, regular stress testing should be conducted based on historical market conditions and forward-looking hypothetical scenarios.

Proposed additional portfolio requirements for money market funds

The MAS proposes to amend the CIS Code to: (a) require money market funds to hold a minimum amount of liquid assets to limit asset-liability mismatches and strengthen their ability to meet redemptions; and (b) to impose additional portfolio weighted average maturity requirements on a money market fund.

The CIS Code will also be amended to make reference to the proposed Guidelines and to emphasise the responsibility of FMCs to put in place sound liquidity risk management practices.

Implementation

The MAS has indicated that the Guidelines and the amendments to the CIS Code are targeted to be issued in Q1 2018. The MAS has proposed a transitional period of three months for FMCs to assess and adopt the sound practices in the Guidelines, where appropriate, and for money market funds to comply with the revised CIS Code.

If you have any questions or would like to find out more, please contact us.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.