The European Directive defines ‘liquidity risk’ as “the risk that a position in the UCITS portfolio cannot be sold, liquidated or closed at limited cost in an adequately short time frame and that the ability of the UCITS to [repurchase or redeem its units at the request of any unit-holder] is thereby compromised;”
Under UCITS IV, for the first time, UCITS must explicitly address liquidity risk, going beyond the cover rules set forth in previous UCITS regulation. However, neither detailed regulatory guidelines nor meaningful and recognized market practices have emerged.
Concepts like mean traded volumes, bid/ask spread or liquidity coverage ratio can be useful, but they are usually not reconcilable across different instrument categories (e.g. structured products, OTC derivatives, high yield bonds, etc.) or the necessary information is just not available. Furthermore, while in some cases asset liquidity risk is well discussed and apprehended, liquidity risk triggered by liabilities, such as large redemptions or other cash outflows, may be more difficult to estimate. As a result, a general and comprehensive framework accounting for asset and liability liquidity risk, both in normal and stressed conditions, may be difficult to design and implement.
In order to help our clients address these new challenges, Deloitte’s risk management experts have conducted empirical research and have built on market experience to set the basis of our proprietary liquidity risk measurement framework.
We have translated the UCITS IV regulatory expectations into a liquidity risk measurement framework anchored around the following steps:
We believe an appropriate liquidity risk measurement framework can be a valuable tool in order to
Our value proposition for liquidity risk measurement framework covers the following areas: