By Nasreen Kasenally, Chief Risk Officer Asset Management, Group Chief Risk Officer EMEA, UBS.
Nasreen, can you please tell the Risk Insights readers a little bit about yourself and your current professional focus?
I am the Chief Risk Officer for UBS Asset Management where my team and I are responsible for independently monitoring and measuring Credit, Market, Liquidity, Compliance and Operational risks on our client assets. I’m a member of both the business and Risk Executive Committee. In these forums I participate in shaping business strategy and influencing the future direction of UBS Asset Management and Group Risk Control. Prior to this, I was the Group Head of Market Risk and joined UBS in 1999. Liquidity is one of my main focus points at the moment, with the structural changes that have taken place both in the market and in the asset management industry, following the Global Financial crisis in 2008.
At the Risk EMEA 2018, you will be discussing, ‘Addressing the challenges and pitfalls of Liquidity Risk Management’ – Why is this a key talking point in the industry right now?
The extended period of low volatility, ample quantitative easing and the explosive growth of ETFs and Passive, have created a false sense of liquidity in certain assets that are inherently less liquid. Examples could include High Yield, Emerging Markets local currency bonds, and small cap equities.
During the same period, Dealers’ balance sheets have contracted almost 5-fold following the change in their capital, liquidity and leverage requirements which has made it more expensive for them to hold inventory. The big question we need to ask ourselves is who will be the liquidity providers in the time of another financial crisis, how much liquidity can they provide, how quickly and at what cost.
As a result, liquidity risk has become a key focus for risk managers, investors and regulators globally. This increase in focus has prompted asset managers to have a Liquidity Risk Framework in place, and a need to have more sophisticated analytics than ever before. The recent pick up in volatility in early February illustrates the need to have analytics that measure liquidity risk dynamically, and on a frequent basis as market conditions evolve.
What are some of the key themes within the current regulatory landscape and why?
Regulators are concerned about the systemic risk that fund unwinds could cause in a falling market and hence want firms to actively manage that risk.
As you are aware, in 2016 the SEC published the Liquidity Rule also known as Rule 22e4 which is designed to better ensure investors can redeem their shares and receive their assets in a timely manner, particularly in times of financial market stress.
IOSCO recently published its recommendations and good practices to improve liquidity Risk management for investment funds. Some of the key principles include ensuring consistency between a fund’s redemption terms and investment strategy, liquidity risk management tools and liquidity stress testing.
How can firms effectively improve measuring liquidity?
My view is that Liquidity risk management should be an integral part of the investment and on-going portfolio management process. It should not just be at fund level; there should also be an understanding at an aggregated level within the firm, as well as the impact of a market dislocation on liquidity.
Asset Managers are taking a two pronged approach in implementing liquidity measure. They are either developing an in-house solution or are reaching out to external vendors. Each solution has its benefits and constraints. The key is to have a solution that includes liquidity stress testing.
What are the key considerations to be made when reviewing liquidity stress testing and scenario analysis?
Having the right tool with the right level of flexibility is key. The challenge is to define a series of relevant scenarios which would take into account some of the structural changes that have taken in place in the market – hence they have to be more forward-looking.
Finally, what challenges do you foresee in the future? And have you got any advice for your peers on how to best handle them?
Adapting to different regulatory regimes simultaneously is challenging as the ‘one size fits all’ approach may not be feasible, resulting in varying degrees of customization and different reporting standards in different regions. As far as advice for my peers, I suggest to – try and find a solution that can not only address a big portion of the regulatory requirements but also acts as your liquidity risk