How is Public Trust supporting its clients to adopt the updated Liquidity Risk Management guidance?  David Callanan, Public Trust’s General Manager Corporate Trustee Services, explains what is required from fund managers as part of the new guidance and what you can expect from your supervisor.

Fund liquidity is how assets in a fund can be sold without negatively impacting the price of those assets or needing to secure funding. Effective Liquidity Risk Management (LRM) for fund managers has been a focus for the Financial Markets Authority (FMA) since 2020 when their MIS Liquidity Risk Management Good Practice Guide was published. That guide set out expectations on managers and reminded them that managing liquidity risk is fundamental to managing investments and a key part of acting in the best interests of investors. A survey-based review followed in 2021, highlighting the FMA’s observations of LRM practices across the MIS industry.

This year in April, the FMA issued an updated Liquidity Risk Management Guide, replacing the 2020 document. The guide outlines from the FMA’s perspective how fund managers can show they are effectively managing and overseeing liquidity risk. It covers the key features of an LRM framework, including but not limited to governance, disclosure and reporting, stress testing, and ultimately the use of liquidity management tools.

The guide aims to assist all licensed managers of managed investment schemes and supervisors to consider LRM at all stages. Emphasis has been placed on the importance of LRM especially at times of heightened market uncertainty and volatility, and ranging from fund design to day-to-day liquidity management and contingency planning.

How is Public Trust supporting clients?

We know it can be practically challenging implementing new guidance. It can take time and be complex.

As supervisor, we play a key role in supporting managers navigate regulatory changes and requirements and help ensure the manager acts in the best interest of investors. The FMA says good management of fund liquidity is important to help ensure investors are treated equitably and funds operate in line with the information given to investors.

As part of our responsibility, we must regularly assess a manager’s LRM policies, processes and tools, and have an active oversight, as well as escalating any material concerns to the FMA.

At Public Trust, we are working on a practical toolkit for effective LRM which centres around the following:

• Liquidity Risk Framework – a summary of matters which managers should consider including in their framework, including, but not limited to oversight/governance, disclosure and ongoing reporting and review (including by the supervisor).

• Liquidity Management Tools – a summary of the key tools available for managers to adopt subject to the manager ensuring that the fund documentation allows their use.

• Scenario testing (i.e. stress testing) –  an outline of scenario and historical events that are used for stress testing and consideration of outputs, results and implications from those tests. While we will recognise and identify historical events that may be applicable, we are also considering how best to provide suggestions on the provision and use of relevant data.

We are planning to facilitate interactive discussions around LRM, with a focus on the above topics, through September and October. We will be in touch once specific arrangements have been made. We will also be following up with a thematic review across all our supervised entities in early 2025.

In the meantime, we expect that all supervised entities are continuing to progress their own gap analysis against the FMA LRM Guide.

If you would like to discuss LRM, for example with someone from our Technical and Assurance teams, please let us know.