Liquidity management proving tricky for investors

Implementing best practices for liquidity management is proving challenging for some asset managers, as concerns mount about the potential for a squeeze in fixed income markets.
Liquidity management proving tricky for investors

With quantitative easing giving way to quantitative tightening and bond markets not as liquid as they used to be, liquidity management is perhaps more important now than ever.

But, as another financial crisis potentially looms, according to the IMF, how well prepared are asset managers and owners?

That was a key issue being considered at two separate events last month as investors mulled the challenges facing them ahead of the next potential credit crunch, now that banks no longer warehouse bond inventory and institutions are increasingly piling into private debt assets 

Ian Coulman, chief investment officer of Pool Re, a London-based terrorism risk reinsurer, is harbouring concerns. 

“There’s a distinct lack of liquidity in markets today if you’re a forced seller, particularly in fixed income markets,” he told the Insurance Asset Management Summit hosted by Clear Path Analysis. That said, he added, sufficient diversification should help mitigate such risks.

No surprise then that regulators and other supervisory bodies have been putting more scrutiny on liquidity management. In August, for example, the Monetary Authority of Singapore (MAS) issued guidelines on liquidity risk management. That came after the International Organisation of Securities Commissions released its own updated best practice recommendations in February.


Yet while the guidelines themselves – which are high-level and principles-based – are clear about what needs to be covered, implementing them is apparently easier said than done.

“We’ve been having a few conversations with clients and potential clients in Singapore about trying to address the MAS guidelines in amongst everything else,” James Paull, Sydney-based manager in the specialist advisory team at consultancy Deloitte, said during a webinar* hosted by financial data provider FactSet and AsianInvestor.

James Paull, Deloitte
Deloitte focuses on the practical impact of the guidelines, he added.

“What governance frameworks do you need? Who needs to sit on the liquidity risk committee? How often should it report to the board? What sort of MI [management information] and metrics do your front-office teams need to be gathering on a daily/weekly basis? What should the policies and procedures look like?" Paull said. “It’s those things we see clients struggling with.

“You can have as much data and MI as you want but unless you have the approach internally that you take it seriously and it’s a decently rated risk within your organisation, you’re never going to approach it with the discipline that you need,” he added.


A key issue these days is the need to have access to the right data and a system to process it, Paull said.

“It’s becoming increasingly difficult to monitor and manage liquidity risk without a system that’s giving you daily, weekly, monthly metrics for time-to-liquidate, cost-to-liquidate, liquidity profiles across your funds, across your entire organisation in aggregate, all those sorts of things."

Ultimately, more focus needs to be put on liquidity risk, Andrew Kovacs, director of analytics at FactSet, said during the same webinar.

“Risk management in general is probably not done sufficiently in many firms, liquidity risk being one aspect of that,” he said. “To do well you have to be very structured and methodical in how you sort of attack the problem."

“Some people are [only] thinking about liquidity risk but that’s not really doing yourself a service or your investors," Kovacs added.

* The webinar, 'Asia’s incoming liquidity rules', can be accessed free of charge by clicking here and registering.

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