Singapore: New Guidelines on Liquidity Risk Management for Fund Management Companies

The Monetary Authority of Singapore (MAS) issued its new Guidelines on Liquidity Risk Management Practices for Fund Management Companies (Guidelines) on 16 August 2018 to introduce a liquidity risk management framework for fund management companies (FMCs) with respect to the collective investment schemes (CIS) which they manage. In connection with the Guidelines, the Code on Collective Investment Schemes (Code) was revised on the same date.

The Guidelines 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). The Guidelines do not apply to holders of a capital markets services licence for real estate investment trust management.

The Guidelines and the revised Code on Collective Investment Schemes can be found here at these links:

Read the full Guidelines

Read the revised Code on Collective Investment Schemes

Some of the key areas covered in the Guidelines include:

• 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 sound governance. In this regard, the board of directors and senior management of the FMC should ensure the FMC has a liquidity risk management function, and subject it to effective oversight.

  FMCs which manage retail CIS with daily dealing are expected to have in place a dedicated and independent risk management function whose responsibility includes liquidity risk management. Other FMCs that do not offer products to retail investors, and have assessed that the CIS they manage have less frequent redemption terms, are at a minimum expected to designate a senior staff to be responsible for liquidity risk management.

• Initial design of product: The evaluation of liquidity risks that the CIS may face throughout the product cycle and the implementation of arrangements to set the foundation for effective liquidity risk management should begin at the product design stage. During the design of the CIS, FMCs should consider whether the CIS’ dealing (subscriptions and redemptions) arrangements are aligned with investors’ expectations, as well as its investment strategy and liquidity profile of the underlying assets. In addition, FMCs also should consider liquidity management tools that may be used, and provide adequate disclosure to investors on the terms, circumstances and implications of these tools.

• Ongoing liquidity risk management: FMCs are expected to monitor and manage the liquidity risk of a CIS throughout its lifecycle. This includes ongoing monitoring of investors’ profile and redemption patterns and conducting regular assessments on the liquidity profile of the CIS’ liabilities and assets. This is to facilitate the FMC’s ability to anticipate or identify an emerging liquidity shortage before it occurs, and take appropriate steps to minimise disruption or detriment to investors.

• Stress testing: FMCs should satisfy themselves that the CIS can withstand liquidity stresses during extended periods of market disruptions or idiosyncratic concerns. FMCs should complement their liquidity risk management tools with regular stress testing. Liquidity stress testing of the CIS should be performed at a frequency relevant to the specific CIS. An FMC is strongly encouraged to perform more regular stress tests on CIS with daily dealing, or CIS which are more susceptible to varying market conditions, such as those which invest in thinly traded markets.

• Recognised CIS: While the MAS does not expect FMCs which act as a Singapore representative for recognised foreign CIS to duplicate the liquidity risk management processes in Singapore, such FMCs should ensure that there is adequate disclosure to investors on the liquidity approach adopted by the CIS. Such disclosure includes clear and simple-to-understand disclosures in the CIS’ offering documents to explain the general approach that the FMC may take, the liquidity management tools that are provided for in the CIS’ constitutive documents, and the impact that such tools may have on investors’ redemption rights. Where the CIS is distributed through third-party distributors, such FMCs should partner with its distributors to communicate these implications effectively to end-investors. Such FMCs should also be kept apprised of developments in the CIS that impact investors in Singapore, including the activation of liquidity management tools. In the FMC’s capacity as Singapore representative, the FMC should consider appropriate updates on such developments to the investors.

• Exchange-traded Funds (ETFs): FMCs that manage ETFs are expected to consider the liquidity of both the underlying assets and the liquidity of the ETFs in the secondary market as part of their liquidity risk management framework. Some relevant considerations include the mode of redemption, the availability of authorised participants, the efficiency of the arbitrage function performed by the authorised participants and the prices at which the ETFs trade in the secondary market.

Some of the key amendments to the Code include:

Chapter 3.1(j) of the Code (new)

The manager should assess and adopt the liquidity risk management practices that are set out in the Guidelines, on a proportionate basis that is commensurate with its role and the scale and complexity of its operations and the schemes that it manages.

This requirement is effective from 17 August 2018.

Chapter 6.2(b) of the Code (amended)

The manager of an authorised scheme is now required to immediately notify participants in addition to the MAS if the dealing in units is suspended, stating the reasons for the suspension. The manager is considered to have notified the participants if a notice on the suspension is sent to the distributors of the scheme for dissemination to the participants.

This requirement is effective from 17 August 2018.

Chapter 6.3 of the Code (amended)

The manager of an authorised scheme is now required to immediately notify participants in addition to the MAS if the manager has resumed the dealing in units. The manager is considered to have notified the participants if a notice on the resumption is sent to the distributors of the scheme for dissemination to the participants.

This requirement is effective from 17 August 2018.

Paragraph 5 of Appendix 2 of the Code (amended)

This paragraph has been amended to introduce additional requirements with respect to the liquid asset holdings of a money market fund.

This requirement is effective from 18 February 2019.

If you have any questions or would like to find out more, please contact our Singapore funds and regulatory team.