The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – has published its guide for Managed Investment Scheme (MIS) managers and their supervisors for effective liquidity risk management (LRM), following consultation.
Fund liquidity is about how fund assets can be sold without negatively impacting the price of those assets. Good management of fund liquidity is important to help ensure investors are treated equitably, and that funds operate in line with the information given to investors. This capability and skill plays an important role in supporting orderly and stable markets, especially during volatile conditions.
This guide updates and replaces the FMA’s 2020 Best practice guide for liquidity management and stress testing. It focuses on managed funds but is intended to assist all MIS managers, and supervisors of those schemes, to consider LRM at all stages of fund management – from fund design to day-to-day liquidity management and contingency planning – and particularly at times of heightened market uncertainty and volatility.
The law requires managers and supervisors to exercise a professional standard of care, diligence, and skill. The law also requires managers to treat scheme participants equitably, and both managers and supervisors to act in the best interests of scheme participants. Given these clear statutory duties and the importance of managing liquidity, all managed funds should have appropriate LRM policies, processes and tools.
The guide contains the FMA’s view of the features of effective LRM, based on international frameworks adapted to New Zealand’s markets. Managers must consider how these features apply to their operations and each of their funds. Following feedback during the consultation, the guide emphasises that managers retain discretion about how they manage liquidity in the context and scale of their own business.
John Horner, FMA Director of Markets, Investors and Reporting, said: “Effective liquidity risk management is a fundamental capability managers need to implement, maintain and enhance. Failure to do so may breach the law. The guide is designed to assist managers and supervisors effectively manage and oversee liquidity risk.
“The guide does not impose any additional burden, to the contrary, it explains how the FMA views liquidity risk management as an essential component of professional standards. In doing so, it recognises the diverse range of MIS manager businesses and funds on offer. We do not expect all managers to implement the guide word for word, but we do want firms to review their systems against the guide and tailor their LRM approach to suit their specific funds.”
