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Regulation

Liquidity Risk Management& Enhanced Fund Reporting
requirements

With reference to:
Circular to Management Companies of SFC
authorized funds on Liquidity Risk Management& Enhanced Fund Reporting requirements
Fund Manager Code of Conduct (FMCC)
August 2018

Contents
02 Reporting buckets & best practice
02 Allocating assets with Bloomberg LQA
04 Evaluating liquidity at the security level
04 Bloomberg’s complete LQA solution

Liquidity Risk Management& Enhanced Fund Reporting
requirements
Introduction
In November 2017, the Hong Kong Securities and Futures Commission (SFC) sought to enhance
the Fund Manager Code of Conduct (FMCC) to ensure that Hong Kong has a robust regulatory
regime in line with the latest international benchmarks. A key point of emphasis in the new
regulations was the maintenance of a risk management framework with appropriate governance.
Following this, in June 2018, the SFC introduced a requirement for authorized funds toprovide enhanced reporting of the liquidity profiles for each fund based upon Assets Under
Management (AUM).
But time is tight. Firms must be in a position to assess asset liquidity profiles for each fund for
close of business September 30. They must then consolidate these into the pro-forma reporting
template required by the SFC, and submit that information by November 5. This is then required
on a quarterly basis going forward.

Deadline: September 30, 2018

Fund Managers
Code of Conduct(FMCC)

Enhancedfund reporting

Consultation
paper published

Revised code
effective date

Nov 17, 2017

Nov 17, 2018

Jun 29, 2018

Sep 30, 2018 Nov 5, 2018

Enhanced fundreporting circular

1st reportingdate

1st filingdeadlineLiquidity risk management & enhanced fund reporting requirements

Reporting buckets & best practice
The template specifies that assets should be assigned to one of four reporting buckets, where
each bucket has a USD equivalent fund value allocated to it along with a percentage of the overall
AUM of the fund. While the SFC has not provided a prescriptive approach to allocating assets toliquidity buckets, it has suggested various liquidity measures and thresholds for each bucket:
Asset +
Liquidity Measure

Bucket 1
High Liquidity

Bucket 2
Medium Liquidity

Bucket 3
Low Liquidity

Bucket 4
IlliquidEquities:
Liquidation horizon<3 days to trade3 – 5 days

5 – 10 days

>10 days

OTC Derivatives:
Liquidation cost

<10 basis points(bps)

10 – 20 bps

20 – 50 bps>50 bps

Allocating assets with Bloomberg LQA
Bloomberg’s award winning solution for Liquidity Assessment (LQA) provides the ability
to quantitatively evaluate market liquidity across multiple asset classes. LQA can assist
firms with both enhanced fund reporting compliance and in building a comprehensive
Liquidity Risk Management (LRM) framework.
The initial challenge is to classify assets into the reporting buckets required by the SFC.
Here’s an example portfolio comprised of both equity and fixed income cash securities
denominated in various Asian currencies:2Liquidity risk management & enhanced fund reporting requirements

Taking the first two line items and using the SFC’s best practice thresholds as a guide, LQA can help allocate assets to buckets.
• Top line item Liquidation cost (one-day time horizon) is 85 basis points, suggesting an “illiquid” position.
• Second line item Liquidation horizon of 1.8 days, suggesting a “highly liquid” asset.

SFC Pro-forma reporting template

Once individual assets within a fund have been allocated to a liquidity bucket, the final stage
is to convert all asset values to USD, then to calculate the net USD amount and the percentageof the total USD fund value attributed to each bucket.

3Liquidity risk management & enhanced fund reporting requirements

Evaluating liquidity at the security level

Bloomberg’s complete LQA solution

Consideration of market liquidity at the underlying asset(security) level is also important. LQA leverages a robust
financial dataset coupled with a big-data framework toallow for liquidity estimation even for instruments withlimited trading activity. Customization of input parameters
enables the calculation of user-specific scenarios.

• Liquidation metrics relating cost, time and transaction size

• Evaluate securities which have either no or scarcesecondary market trading activity.
• Consider round-trip liquidation costs for average
institutional sized transactions.
• Access relative liquidity metrics:— Compare the average one-day liquidation cost fora range of transaction sizes on a per-security basis.
— Show how the average cost relates to a universeof other securities.

4• Consistent cross asset-class analytics• Ability to customize input parameters and perform
scenario analysis• Regulation-ready data sets
• Quant product support and challenge desk
• Available via Enterprise Data-Feed

Learn more
Learn more about how we can help your firm automate its
data needs. Visit bloomberg.com/liquidity or reach out to an
Enterprise Liquidity Sales specialist at eprise@bloomberg.net.

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