In late 2017, the MAS consulted on enhanced liquidity risk management requirements for Singapore’s Fund Management Companies, to help them to “mitigate potential mismatches between the liquidity of the [fund’s] underlying assets and the redemption terms under which the [fund] is offered to investors.”
Following feedback from industry, including several in-depth discussions with trade associations, the final version of the Guidelines was issued on 16th August 2018. FMCs have 6 months to implement them with respect to existing collective investment schemes (funds), and must apply them in full now to any new funds.
Who is caught by the new regime?
Precisely which of Singapore’s licensed fund managers and RFMCs would be subject to the new requirements was hotly debated. The MAS’ feedback to the consultation, and the Guidelines, confirm the following:
- Whilst the primary focus is naturally on open-ended funds, managers of closed-ended funds (or funds with lock-up periods) are also on the hook. Such FMCs will need to determine if there may be liquidity difficulties at the point when the lock-up period ends, for instance.
- The Guidelines are agnostic about the types of investor that funds are targeted at. Not just retail funds are subject to liquidity risk management. However, processes can be flexed according to (amongst other things) investor types.
- Exchange-traded funds are also caught – the liquidity aspects of underlying investments, as well as the ETF itself, will need to be considered. The MAS will keep this under review in the context of international developments in this area.
- The requirements do not need to be applied in full by FMCs that act as representative for Recognised Funds that are domiciled elsewhere – provided that the liquidity requirements in the jurisdiction of domicile are comparable to those of the MAS. Instead, the Singapore manager is subject to disclosure requirements, and is compelled to be on full alert to relevant developments that might impact Singapore investors.
- FMCs with partial responsibility for the management of a fund should apply the Guidelines according to the substance of their role. For instance, Singapore managers that have no control over the fund’s redemption terms need not meet the MAS requirements relating to the design phase of a fund. Such rationale should be documented in the FMC’s liquidity risk management program.
The new regime specifically does not apply to segregated mandates or fund-of-ones, nor to FMCs which carry out only research or non-discretionary functions.
Managers of money market funds (MMFs) are firmly caught, and are in addition subject to certain quantitative restrictions.
What does the new regime look like?
The meat of the Guidelines is divided into four sections, summarised below:
Governance – there must be some kind of liquidity risk management function, either standalone, or as part of a group function, or a designated senior member of staff for an A/I FMC. Fit-for-purpose policies and procedures, subject to periodic review, should be in place. As expected, the effectiveness of these should be monitored.
Initial design – at this stage, the management of liquidity risks during the full cycle of the fund should be thoroughly considered. For instance, dealing frequency (subscriptions and redemptions) should align with the fund’s investment strategy and the liquidity profile of its assets. Liquidity management tools, such as redemption gates and swing prices, should be fair – for instance, when there are redemptions, remaining investors should not bear a disproportionate share of the costs of those redemptions. Offering memoranda should include appropriate disclosures relating to the liquidity of the fund.
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 – FMCs should carry out regular stress testing to ascertain whether the fund could withstand liquidity stresses. Managers are encouraged to consider a number of scenarios occurring concurrently, for example sizeable redemptions at the same time as unfavourable market movements in the underlying investments.
How Bovill can help
All Singapore Managers will need to react to this paper in some way, shape or form – whether it be designing and implementing a full liquidity risk management framework, documenting why the requirements don’t apply, or somewhere inbetween.
We at Bovill can assist with all aspects of meeting the requirements, whichever end of the spectrum you are. We can help to determine what your framework should look like, or review what you already have in place. When helping clients, we draw from our experience of working with those in other jurisdictions with similar liquidity regimes, such as Hong Kong – whilst of course keeping a close eye on the MAS-specific detail to avoid gold-plating 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.