The Financial Markets Authority (FMA) has garnered mixed reviews for its new fund manager liquidity guide from a feedback group of just 12.
In general, the FMA notes the submissions on the draft fund liquidity guidance published late last year fell under three areas of concern: clarity, certainty and implementability.
“Some submitters sought word changes to clarify what was mandatory or good practice (e.g. looking at what is a ‘must’ or ‘should’),” the regulator says, noting the final guide was amended in part following the industry feedback.
However, the FMA knocked back other industry calls for a regulator-defined description of ‘illiquid asset’ in line with global standards produced by the Financial Standards Board (FSB).
“We generally agree it would be valuable for New Zealand to have a broadly standard approach to defining illiquidity,” the FMA says before arguing the guide is “not a suitable place for that type of definition”.
As well, the regulator says it remains unclear if the NZ managed funds market “would align with the FSB’s focus on macro-stability given the difference in size, scale, and complexity compared with global markets”.
Finally, the FMA says the new guide, which updates the 2021 edition, is not intended as a user-manual.
“We do not expect the guide to be ‘implemented’ by Managers – its purpose is to assist Managers and Supervisors to understand how we see LRM in light of their statutory duties, and to consider at their discretion what (if any) changes to their fund LRM practices should be made,” the regulator says.
In another win for industry consultation, the FMA removed a helpful hint in the draft guide that managers should ‘stress-test’ portfolios for liquidity issues at least once a year, leaving it to the discretion of each firm to “determine what (if any) stress testing is appropriate for a particular fund”.
John Horner, FMA director markets, investors and reporting, said the guide is “not a recipe” for how to manage liquidity risk.
“It’s just a bunch of ideas for managers and supervisors to consider and use where appropriate,” Horner said. “Even if they don’t like our guide, we think they will find it useful.”
While the guidance targets licensed fund managers, the FMA says it could also prove helpful for lightly regulated investment firms such as wholesale managers.
Among the dozen submissions, the Boutique Investment Group (BIG), which represents 20 or so non institution-owned investment managers, notes having to meet onerous liquidity compliance duties could put unnecessary pressure on small-to-mid-size businesses in particular.
“… most of the ideas in the guidance are not things we disagree with per se,” the BIG submission says, but requiring “all fund managers to commit to say developing all singing, all dancing comprehensive frameworks and undertaking significant stress testing would be overkill…”
Elsewhere, consultancy firm Mosaic Financial Services Infrastructure, says KiwiSaver managers may require “more explicit” regulatory guidance on liquidity risks given the sector’s anchor role in the NZ funds market.
“We are particularly mindful that a suspension (albeit short) of a KiwiSaver scheme (or fund within it) could create a ‘run’ of redemption requests, further exacerbating the issue which could become systemic from a market perspective,” the Mosaic note says.
Liquidity concerns have long been cited as a barrier to investing in unlisted assets for KiwiSaver schemes, although several providers – including Pathfinder, Simplicity, Generate and Booster – have made small allocations to venture capital funds or direct holdings in start-ups.
It is understood, private asset groups are lobbying hard in favour of a National government pre-election proposal to allow multi-KiwiSaver membership – partly to ease the way for schemes to hold illiquid assets while still complying with requirements to meet transfer requests on demand.