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A smarter way for Australian super funds and portfolio managers to manage liquidity risk

As regulators introduce more stringent requirements, ICE offers a solution

Published

April 2024

Dwijen Gandhi Headshot
Jim Ou-Yang
Fixed Income Specialist, APAC
ICE

Australian super funds and fund managers are bolstering their liquidity management systems as regulatory scrutiny of the area continues in the wake of the pandemic.

While most asset managers appeared to navigate their way through the crisis successfully, it raised deeper systemic concerns and long-lasting lessons about liquidity risk which has led to a global regulatory overhaul.

The Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) as well as other global regulatory bodies, have since unveiled new, stronger liquidity standards.

Pandemic prompts new regulatory focus

Many Australian funds were forced to keep a closer eye on liquidity levels during the height of the pandemic to ensure they had enough liquid assets to meet margin drawdowns, investor redemptions, and billions of dollars withdrawn through an early release scheme.

It prompted APRA to overhaul its Prudential Standard SPS 530 Investment Governance, which now includes more stringent requirements, while ASIC also updated its Regulatory Guide 132 – Funds Management: Compliance and Oversight.

The new regulations require super funds and fund managers to show they understand every position in their portfolio at a deeper level.

Super funds must conduct regular liquidity stress testing on their portfolios and develop an approved liquidity risk management plan under the supervision of the board. This is no longer a theoretical exercise.

Liquidity is often taken for granted until an unforeseen event radically changes the situation. Asset managers need to know exactly how much it will cost and the time it will take to liquidate the portfolio under a range of scenarios.

The accuracy of these calculations is dependent on robust systems, but this means little without high quality data.

Fixed income challenges

More than half (53.3%) of the average super fund’s assets are allocated to equities1, where data is transparent and readily available.

However, obtaining timely, quality data for other asset classes, such as fixed income, is more challenging. Fixed income accounts for more than one-fifth (20.3%) of the average super fund’s portfolio, according to APRA. For many investors, fixed income becomes more important as they get older: one of Australia’s biggest super funds, Aware Super, has over 80% (600,000) of their accumulation members in a fund which lowers their allocation to growth assets as they age. While under-55s are allocated 100% to high growth assets (0% fixed income) those 65 and older have 100% exposure to conservative balanced portfolios (17% fixed income).

This is a vital consideration to meet APRA’s requirement that funds understand the liquidity of their individual positions and overall portfolios. Without high quality fixed income data to underpin valuations, it is difficult to gauge liquidity.

To meet this challenge, investors need a liquidity solution that integrates historical trade information to help assess liquidity.

ICE’s Liquidity IndicatorsTM service incorporates market data into liquidity models to produce a range of liquidity metrics covering ~4.6 million instruments. This includes global fixed income, equities and exchange-traded products such as options and futures.

The integration of historical trades and other market information forms the foundation of reliable fixed income liquidity projections, which enables a broader liquidity framework to be built, including stress tests. These can be modelled to show how a portfolio will react to various types of downturns, such as COVID, the global financial crisis, or user-defined scenarios.

The ICE Liquidity Indicators solution is utilized by local asset managers and investment support departments in tier 1 banks throughout the Asia-Pacific region and provides estimations of the duration needed to liquidate securities in baseline and stress scenarios. It considers factors such as bid-ask spread, price volatility, and trade volume. These analytics help asset managers to proactively manage liquidity risks, stress test their portfolio with ICE pre-built scenarios to ensure they are meeting compliance, meet regulatory requirements and make informed investment decisions. ICE's current bucket rule is also in accordance with the regulatory requirements across various jurisdictions.

This more robust approach to liquidity is now mandatory for super funds and fund managers. Asset managers who don’t include high quality fixed income data and analytics to help assess market risk leaving themselves vulnerable to a liquidity crunch or increased regulatory oversight.


1 Quarterly superannuation statistics | APRA. (2024, January 29). Link

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