NZ FMA is not impressed with fund liquidity practices
The FMA says liquidity stress tests are not performed frequently enough and that fund managers do not have sufficient liquidity management tools.
The New Zealand Financial Markets Authority (FMA) has issued a new report providing recommendations on the liquidity risk management frameworks, processes and procedures used by fund managers.
The report follows an August 2020 survey conducted by 51 managers of managed investment funds, in which they self-assessed their liquidity risk management capabilities.
Based on the results of the survey, the FMA assessed the maturity of the liquidity risk management frameworks of the fund managers, examining the methods they used, the experience of their staff, the quality of their frameworks and policies, as well as their governance, oversight and reporting practices.
The FMA said fund managers appeared to have a positive view of their liquidity risk management capabilities, including stress testing.
“We consider this too optimistic, based on the answers to the detailed questions about their capabilities, and also taking into account the expectations set out in our liquidity risk management good practice guide published in April 2020, ”said the regulator.
Even the top performers showed significant gaps in particular capacity areas, such as the frequency of stress testing and in their use of available cash management tools and metrics, the FMA said.
In general, the FMA expects fund managers to perform liquidity stress tests at least once in every 12 month period, and more frequently if market conditions warrant. As it turned out, fund managers typically perform liquidity stress tests infrequently and on an ad hoc basis.
The results of stress tests should be used to explicitly inform changes in asset allocation, and assessments of the suitability and suitability of liquidity, risk appetite and pricing tools, and any changes required as a result.
The FMA also noted a lack of availability of liquidity management tools, where companies have mainly relied on liquid assets as the default response to a liquidity crisis. This could prove to be insufficient and conflict with the fundamental principle of fair treatment of investors, the regulator said.
In most cases, should highly liquid assets become illiquid, managers have said their next option will be to halt buybacks, which could exacerbate and extend a liquidity crisis across New Zealand, the FMA said.
Fund managers do not have sufficient cash management tools, and those who do may not be using their experience to improve their processes, the FMA said.
The report cautions managers against complacency about their capabilities, suggesting that their boards and oversight bodies maintain effective oversight and offer a constructive challenge.
This includes forming their own view of their entity’s liquidity risk management capabilities, maturity and culture, and assessing the extent to which these enable the manager to operate consistently across the board. within its risk appetite and defined policy parameters. “This will allow them to identify desirable changes and ensure that management takes action to respond to those changes. “
For the foreseeable future, the FMA expects liquidity risks to be increased by market volatility and low interest rates.
The FMA intends to continue with another survey aimed at understanding how managers would implement the policies, procedures and tools available to them in practice in two hypothetical liquidity risk stress scenarios.