30 August 2018
On 16 August 2018, the Monetary Authority of Singapore (“MAS”) issued the “Guidelines on Liquidity Risk Management Practices for Fund Management Companies” (SFA 04-G08) (“Guidelines”) which provide guidance to fund management companies (“FMCs”) on sound liquidity risk management (“LRM”) practices with respect to the management of collective investment schemes (“CIS”). The Guidelines do not apply to FMCs which do not have discretionary authority for the CIS.
MAS has also issued a revised Code on Collective Investment Schemes (“CIS Code”) to impose additional portfolio requirements for money market funds (“MMFs”).
FMCs have a transition period of six months to enhance their systems and set up processes for ongoing LRM and stress testing. However, FMCs are expected to start incorporating liquidity considerations in their product design process for new funds that are launched after the issuance of the Guidelines. MAS will also give MMFs a transition period of six months to rebalance their portfolios to comply with the new CIS Code requirements. For the avoidance of doubt, MAS has clarified that it is acceptable for FMCs to include the necessary disclosures on LRM in the prospectus for a retail CIS at the next annual relodgement, if needed.
- MAS has issued new Guidelines on Liquidity Risk Management Practices for Fund Management Companies which provide guidance to FMCs on sound LRM practices with respect to CIS management. The Guidelines set out requirements on matters such as governance, ongoing LRM and stress testing.
- The CIS Code has also been revised with additional portfolio requirements for MMFs.
- Both FMCs and MMFs have a six-month transition period to implement the new requirements.
MAS had on 26 October 2017 issued a consultation paper titled “Liquidity Risk Management Framework for Fund Management Companies” (“Consultation Paper”) and sought feedback on proposed new Guidelines which set out the LRM framework for FMCs that manage open-ended CIS. The aim was to provide specific guidance to FMCs on sound LRM practices to ensure investors’ redemption requests are met in a timely and orderly manner. MAS had also proposed to revise the CIS Code to impose additional portfolio requirements for MMFs to enhance MMFs’ resilience to liquidity risks and strengthen their ability to meet redemption requests from investors, especially during stressed market situations. The public consultation closed on 27 November 2017.
On 16 August 2018, MAS issued its Response to feedback received on the Consultation Paper and stated that it has made further revisions to the Guidelines where appropriate. The key points from MAS’ Response are set out below.
Who are subject to the Guidelines?
The Guidelines apply to (a) licensed FMCs, which hold a capital markets services licence (“CMSL”) for fund management, and (b) 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 CMSL for real estate investment trust management. MAS has also clarified that the Guidelines do not apply to FMCs which do not have discretionary authority for the CIS.
Generally, each FMC should consider how best to apply and adopt the LRM practices set out in these Guidelines, taking into account the size, scale and complexity of its business and the profile of the funds that they manage.
The following are some aspects of the Guidelines in relation to applicability:
- FMCs with responsibility for recognised CIS: While FMCs acting as representatives for recognised CIS constituted in jurisdictions with comparable LRM requirements (e.g. UCITS in the EU) need not duplicate the requirements for these CIS in Singapore, they need to ensure adequate disclosure to investors on the LRM approach applied to the CIS and put in place arrangements to keep themselves apprised of developments impacting the CIS’ ability to meet redemption requests from Singapore investors.
- FMCs that are sub-managers: FMCs that are sub-managers need to operate the CIS in line with the LRM parameters set by the main manager, and monitor the liquidity of the portfolio delegated to the FMC. Such FMCs may take reference from the main manager’s LRM policies and procedures, instead of having an entire distinct set of policies.
- CIS offered to non-retail investors: After considering suggestions that the Guidelines be applied to CIS offered only to retail investors or that carve-outs be made for CIS offered only to institutional investors, MAS decided to retain its proposal to apply the Guidelines to FMCs that manage all types of open-ended CIS, regardless of the investor types.
- Closed-ended CIS and CIS with lock-up periods: Notwithstanding that LRM is less critical for closed-ended CIS and CIS with lock-up periods, MAS expects FMCs managing such CIS to be mindful of potential sources of liquidity risks. MAS has clarified that the Guidelines do not apply to segregated mandates and funds-of-one which are set up for a single institutional investor.
- Applicability to exchange-traded funds (“ETFs”): FMCs that manage ETFs need to comply with the Guidelines. MAS expects such FMCs to consider the liquidity of both the underlying assets and the liquidity of the ETFs in the secondary market, taking into consideration matters such as the mode of redemption and the availability of authorised participants.
Key areas covered by the Guidelines
The following are some of the key areas covered by the Guidelines:
- Governance: An FMC’s LRM process must be supported by sound governance. The Board and senior management has to ensure it has an LRM function that is subject to effective oversight. FMCs managing retail CIS with daily dealing are expected to have in place a dedicated and independent risk management function whose responsibility includes LRM. FMCs that do not offer products to retail investors, and have assessed that the CIS they manage have less frequent redemption terms, are minimally expected to designate a senior staff to be responsible for LRM.
- Obtaining information and monitoring trends on investor profile and concentration: FMCs must continue to monitor and manage the CIS’ liquidity risks throughout its life cycle so as to facilitate anticipating an emerging liquidity shortage before it occurs and taking appropriate steps to minimise disruption or detriment to investors.
- Disclosures to investors: The Guidelines require FMCs to include clear and simple-to-understand disclosures in the CIS’ offering documents to explain the general approach 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.
- Stress testing: The Guidelines require FMCs to complement their LRM tools with regular stress testing, which 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, e.g. those which invest in thinly traded markets. The Guidelines set out appropriate factors to consider in stress tests, e.g. a simulation of the behaviour of different types of investors.
- Notifying investors of suspension and redemption of dealings: Currently, the manager and the trustee of CIS are required to notify MAS of suspension and resumption of dealing in units in a CIS. MAS has amended the CIS Code to require participants of the CIS to be notified of such situations as well to ensure they are kept informed whenever regular dealing in units in the CIS is interrupted.
Changes to CIS Code for MMFs
The CIS Code has been revised to impose additional portfolio requirements for MMFs:
- Portfolio weighted average maturity limits: MAS will proceed with its proposal to revise the CIS Code to impose a portfolio weighted average maturity limit of 60 calendar days for a short-term MMF and six months for other MMFs. The limit should be weighted based on the market value of each of the fund’s non-deposit investment, and calculated based on the non-deposit investment’s remaining term to maturity or remaining term to the next interest reset, whichever is shorter.
- Liquid asset holdings: MAS will proceed with its proposal that an MMF (including a short-term MMF) should invest at least (i) 10% of its net asset value (“NAV”) in daily maturing liquid assets, such as deposits or securities that will mature or are exercisable and payable within one business day; and (ii) 20% of its NAV in weekly maturing liquid assets, such as deposits or securities that will mature or are exercisable and payable within five business days.
The following materials are available on the MAS website www.mas.gov.sg:
- Guidelines on Liquidity Risk Management Practices for Fund Management Companies (SFA 04-G08)
- Code on CIS dated 16 August 2018
- Response to Feedback Received on Consultation Paper on Liquidity Risk Management Framework