Since mid-2020, the AMF has been adhering to ESMA guidelines on liquidity stress test scenarios for UCITS funds and AIFs. In 2021, after analyses and discussions with 200 portfolio management firms, Liquidity Stress Tests were prioritized for supervision by the AMF.
There are now several points to keep in mind when it comes to liquidity management:
- Pre-investment assessments (formalize liquidity assumptions pre-investment)
- Stress tests on fund assets and consistency of the assumptions used in models
- Recognition of liabilities and repurchase simulations
- Margin calls and derivatives
What are the challenges when it comes to asset monitoring?
- Managing the risk associated with massive buyouts and cost overruns
- Determine a fund’s capacity to generate cash within a limited timeframe
- Ensure that the disposal of assets does not result in additional costs or change the initial position of the fund
- Identifying the impact of a scenario on prices and volumes
- Adjust volume and price assumptions
- Apply a transaction surcharge in a stress test scenario
- Apply different bid/ask spreads to an industry or market cap category
- Using different selling strategies in stress test scenarios
- Strategies without adjusting the portfolio risk profile
- Strategies that limit additional costs for illiquid holdings but modify the fund’s liquidity profile
- Identifying liability quality
- Breakdown of the largest investors
- Redemption risk indicators by category
- Harnessing historical data from inflows
- View history of the largest repurchases, both by volume and as a % of AUM
- Over 1 days, 5 days, for 1 investor, etc.
- Model subscription/redemption dynamics
The features JUMP can provide to overcome these challenges:
- Ability to edit a set of standard scenarios you can run on demand
- Library of stress test scenarios to apply to the portfolio on a given date
- Examples: Small cap stress test, money market fund stress test, etc.
- Extensive monitoring to enhance liquidity models
- Cash management for derivatives
- Margin calls and increased collateral deposits
- Liquidity scoring for securities without volume data
- Production of liquidity risk monitoring and indicator reports
- Customizable graphs and charts using dashboards
- Reports for the risk committee
Liquidity Risk use cases in JUMP:
- Portfolio Manager
- View the liquidity of one holding and/or the least liquid positions
- Anticipate cash flow under stress conditions according to different assumptions
- Control rebalancing in case of shock according to a strategy adjusted to the risk profile of the fund
- Risk Manager
- Matrix of maximum losses per scenario, per market, etc.
- Detailed breakdown of asset liquidity
- Alerts when liquidity thresholds are crossed by asset class or for a shareholder’s investment ratio
- Compliance Manager
- Simulate regulatory and statutory controls on a stressed portfolio
- Recognize liability allocation/holdings of the largest investors
- Assistance reporting to regulatory authorities
