MAS seeks to introduce mandatory liquidity requirements for Singapore’s fund managers

Bovill

MAS has issued a consultation seeking to enhance the liquidity risk management requirements for Singapore’s fund managers. Open for feedback until 27 November, if implemented the proposals will require managers of open-ended funds to more formally manage liquidity risk.

Until now, FMCs have been subject to a high level requirement to identify, address and manage risks associated with customer assets under their management. MAS’ recent consultation calls for both LFMCs and RFMCs – retail and non-retail – to specifically address the “risk to investors from potential liquidity mismatches between the CIS’ portfolio liquidity and redemption terms”.

Who’ll be caught by the new regime?

Whilst the primary focus is on open-ended funds, the Regulator is keen to point out that managers of other funds should be “mindful” of the requirements – PE, VC, infrastructure and other closed-ended managers are therefore not expected to be off the hook. Managers of money market funds (MMFs) will be firmly caught, and will additionally be subject to quantitative restrictions.

The intention is that only those making discretionary investment decisions will be caught (whether that be in relation to all or part of the portfolio).  MAS confirms in the consultation that it does not intend for those only carrying out research, or giving advice to other FMCs, to be captured by the new requirements.

What does the regime look like?

In recognition that one size doesn’t fit all and that proportionality is key, MAS’ expectations are set out in the form of Guidelines rather than a Notice. The new requirements will fall under four main headings, and go into some detail. These are summarised below:

  • Governance – FMCs must have a liquidity risk management function, or where appropriate a senior individual should be formally responsible for this risk. Fit-for-purpose policies and procedures, subject to periodic review, should be in place. And, as expected, the effectiveness of these should be monitored.
  • Initial design – management of liquidity risks during the full cycle of the fund should be thoroughly considered at product design stage. For instance, dealing frequency (subscriptions and redemptions) should align with the investment strategy and the liquidity profile of the fund’s assets.
  • Ongoing liquidity risk management – processes should be put in place to help anticipate emerging liquidity issues before they occur. Naturally, the methods of achieving this will depend on investor type and the way that the fund is distributed. But the expectation is that FMCs should manage (or even pre-empt) large redemptions to ensure that they are not detrimental to other investors. The importance of liquidity considerations when making investment decisions is also emphasised.
  • Stress testing – to ascertain whether the fund can withstand liquidity stresses (for instance during severe market disruption), FMCs should carry out regular stress testing. This should incorporate both historical market data as well as forward-looking hypothetical scenarios – and if the testing yields concerns, these should be appropriately escalated.

Finally, what are the expected timeframes?

MAS has indicated the guidelines (and amendments to the CIS Code for MMFs) will be implemented in Q1 2018, with a three month transitional period.

Some FMCs will already have robust liquidity processes and controls in place – although it would be wise for them to perform a gap analysis to demonstrate to MAS that there is indeed full coverage. Certainly, other FMCs will have some work to do. When helping clients, we draw from our experience of working with those in other jurisdictions with similar liquidity regimes – whilst keeping a close eye on the MAS-specific detail and taking care to not gold-plate the Singapore standards. If you’d like to have a chat about how we can help you, please get in touch with our Managing Consultant Billie-Jo Dixon.

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