Certain authorized fund managers did not have adequate liquidity risk management systems and controls in place, Hong Kong's regulator found. They are reminded to review their policies and systems.
The SFC reminds fund managers to implement robust risk management systems and establish well-documented liquidity risk management policies and procedures for the funds they manage. Liquidity risk, a key risk faced by funds especially during times of market stress, arises as a result of the mismatch between the liquidity profiles of the assets and the liabilities of open-ended funds.
«It is of paramount importance for fund managers to exercise due care, skill and diligence in managing the liquidity of SFC-authorised funds under their management, minimize the risk of not meeting investors’ redemption requests and safeguard the interests and ensure the fair treatment of fund investors,» the SFC wrote in a circular on Friday.
Lack of Proper Controls By Certain Funds
The SFC surveyed selected fund managers which are licensed by the SFC and manage SFC-authorised funds (Authorised Fund Managers) to understand their liquidity risk management processes and conducted inspections on some of these fund managers to assess their compliance with the July 2016 circular on liquidity risk management, as well as their implementation of enhanced requirements under the Fund Manager Code of Conduct (FMCC).
SFC’s recent survey and inspections found deficiencies from some authorized fund managers in maintaining proper liquidity risk management systems and controls in areas such as governance, asset and liability liquidity profiling, stress testing, reporting and other documentation.
Better Controls
The SFC underlined the need to perform more frequent and enhanced liquidity stress testing including for forward-looking hypothetical scenarios, especially in given the current macro environment.
Liquidity risk management, together with securities lending and repurchase arrangements, safe custody of fund assets and disclosure of leverage by fund managers, will remain a key focus of fund manager supervision in the coming years, the SFC said.
