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SFC issues guidance on liquidity risk management of SFC-authorised funds

Further to the earlier issues of our newsletter featuring the Securities and Futures Commission’s (SFC) regulatory concerns on funds’ liquidity risks, the SFC issued a circular to management companies of SFC-authorised funds on 4 July 2016 (Circular) providing guidance to managers on what the SFC expects in order to ensure effective liquidity risk management of retail funds.

As a general principle, managers should at all times exercise due care, skill and diligence in managing the liquidity of funds under their management and to enable the funds to meet investors’ redemption requests while ensuring fairness to the remaining investors in the funds.

The guidance sets out a number of key protocols that managers should implement or carry out, as part of their liquidity risk management programme, as well as examples of good practices. We summarise the key areas below:

Managers’ governance structure

A manager should have effective and well-documented liquidity risk management policies and procedures in place, which are reviewed regularly and updated as needed. In terms of governance structure, there should be an independent liquidity risk management function, separate from the day-to-day portfolio investment function, to monitor the implementation of the relevant policies and procedures, which is subject to oversight by a risk management committee or senior management of the firm.

Product design and disclosure

In designing a new product, a manager should consider the liquidity profile of the fund’s underlying assets and liabilities, expected redemption patterns, etc. to ensure that the dealing arrangements are appropriate. Appropriate disclosures should be made in the fund’s offering documents to address the potential impact of liquidity risk.

Ongoing liquidity risk assessment and stress testing

Once the fund is in operation, the manager should continue to assess the fund’s liquidity profile under the current and likely future market conditions, on a regular basis. Liquidly stress testing on the funds should be performed to assess the impact of changing market conditions. Appropriate documents and records should be kept for such assessments and tests.

Liquidity risk management tools

Managers should review the liquidity risk management tools available for the funds, such as tools to allow the managers to delay or limit redemptions, and to allocate costs of redemption to redeeming investors (e.g. by imposing swing pricing or anti-dilution levy). The managers are expected to maintain internal procedures on the use of liquidity risk management tools, and to provide adequate disclosures to investors in the offering documents about these tools.

All mangers licensed by or registered with the SFC are required to enhance their internal process to implement the Circular by 1 January 2017. Overseas managers appropriately licensed and based in an acceptable inspection regime (currently defined as being Australia, France, Germany, Ireland, Luxembourg, Malaysia, Taiwan, United Kingdom and United States of America) or subject to a mutual recognition of funds arrangement are expected to comply with their home jurisdictions’ liquidity risk management practices.

In new fund applications, managers may also expect requisitions from the SFC as regards the measures in place to manage the liquidity of the fund and managers of existing SFC-authorised funds may be called upon to demonstrate compliance, in the event liquidity issues arise. 

主要负责人

Jeremy Lam (林俊明)

合伙人 | 金融服务

电邮 或致电 +852 2825 9732

萧景霞

合伙人 | 金融服务

电邮 或致电 +852 2825 9568

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