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The Financial Conduct Authority (“FCA”) had set out its expectations for good practice in this area and in doing so referred to the Financial Standards Board (“FSB”) and International Organisation of Securities Commissions (“IOSCO”) which had recently published its multi-firm survey results and guidance on the topic.
As I noted at the time, the FCA guidance spoke strongly to effective governance and the creation of a liquidity ‘playbook’ that set out actions and escalations (including the use of various tools) to be followed when liquidity stress testing triggers are activated, and in preparation for various market scenarios. It also reinforced the importance of understanding not only the liquidity characteristics of the securities owned by a fund and how those characteristics may be changing, but also the behavioural dynamics of investors in the fund(s) and how they may be changing.
It is good to see that the latest thinking from the FMA on liquidity risk management issued for consultation, now has a heightened focus in these areas and incorporates the IOSCO and FSB perspectives. Bringing all the proposed 11 “features” noted in the draft FMA guidance into a comprehensive and cohesive liquidity risk management response framework (assuming the guidance is confirmed in broadly the form submitted) will potentially be a significant piece of work for MIS managers, notwithstanding that I expect many will have several, if not all, of the components already.
Across the Tasman, APRA has been lifting its focus on investment governance and risk management for Registrable Superannuation Entities, issuing new guidance in July in the form of SPG 530. This guidance is quite detailed, setting expectations around stress testing from both a performance and liquidity perspective, liquidity risk management generally and considerations regarding the valuation of unlisted assets (along with some other matters) – it is well worth a read.
Mosaic intends submitting on the FMA guidance and we would welcome the opportunity to speak with our MIS clients as part of that process – we have some “lived experience” with both the development and implementation of responses in liquidity crises which we are happy to share.
