“Building Resilience and Navigating Risks for Fund Managers” – Opening Address by Mr Tan Keng Heng, Executive Director, Monetary Authority of Singapore, at the Investment Management Association of Singapore’s 7th Regulatory/ Legal Roundup Forum on 28

Published Date: 28 May 2021The Monetary Authority of Singapore

Ms Fann Teh, IMAS Regulatory Committee Chairman,
Panel Speakers,
Members of IMAS,
Ladies and gentlemen

INTRODUCTION

Good afternoon and thank you for having me at this year’s IMAS Regulatory Forum.

2020 was a challenging year – one that brought to centre-stage far-reaching changes that will shape the world in years to come.
• The COVID-19 crisis has exposed vulnerabilities in the world economy.
• In its wake, another global challenge – that of climate change and more broadly, environmental risk – has come to the fore.

2020 also provided timely reminders for building resilience to global risks:
• The challenges faced are multi-faceted, with profound social, economic and financial consequences that need to be considered more carefully.
• The experience has shown that financial institutions and regulators alike have the capacity to adapt to change.

This is evident from everyone’s presence on this virtual forum and I would like to take this opportunity today to talk more about resilience in four areas:
• One, building portfolio resilience to environmental risk.
• Two, strengthening fund resilience to liquidity risk.
• Three, developing early readiness for LIBOR transition.
• Four, enhancing operational resilience in a remote working environment.

Let me first turn to the topic of environmental risk.

BUILDING PORTFOLIO RESILIENCE TO ENVIRONMENTAL RISK

Environmental risk is a key global risk that can result in financial and reputational impact to financial institutions (FIs) and the assets that they manage.
• At a temperature rise of two degrees Celsius, an estimated US$1.7 trillion of global financial assets could be at risk of a write-down in value [1] .
• By 2050 [2] , up to US$20 trillion of assets across the energy, industry and building sectors globally could become stranded.

The financial system can play a catalytic role in mitigating environmental risk and driving the transition towards greener practices.
• As financial intermediaries, fund managers also have the fiduciary responsibility to build resilience in their portfolios against the impact of environmental risk.

Fund managers in Singapore are already taking active steps to green their investment portfolios.
• The proportion of ESG-managed assets as a total of assets under management in Singapore stood at 34% [3] in 2019, and the latest numbers for 2020 is expected to be higher.
• Over 80% of the top traditional asset managers among you are signatories to the UN Principles for Responsible Investment and have onboarded ESG and sustainability considerations in your investment processes.

To mainstream sustainable investing, more can and should be done.
• Strengthening the financial sector’s resilience to environmental risk is one of the key thrusts of the Green Finance Action Plan (GFAP).
• GFAP was launched by MAS to make sustainable finance a defining feature of Singapore’s role as an international financial centre.
• As part of the GFAP, we published the Guidelines on Environmental Risk Management for Asset Managers in December last year to help fund managers enhance their management of environmental risk.

Two points about the Guidelines are worth noting:

Firstly, MAS is cognisant of the wide spectrum of fund managers with varied capacity and business models.
• It was with this in mind that the Guidelines were co-created with IMAS and the industry, and developed in consultation with academia and NGOs.
• The end result is a set of guidelines that can be implemented in a risk proportionate manner, taking into account the fund manager’s size, investment focus and strategy.

Secondly, MAS recognises that fund managers will need time to build up expertise and capacity in this area.
• As such, we have provided an 18-month transition period to implement the Guidelines with effect from June 2022.
• We will be engaging fund managers that are more advanced in their environmental risk management in the second half of this year to take stock of their progress and identify good industry practices for all.

Over time, MAS plans to promulgate best practices and facilitate knowledge-sharing and capacity-building within the industry.
• We will do so by, among other things, sharing key observations and good practices with the industry by the end of the year.
• We are also collaborating through industry-driven initiatives such as those under the Green Finance Industry Taskforce (GFIT) [4] , which include for instance:
   o A handbook that offers guidance to FIs, including fund managers, on best practices on environmental risk management;
   o A guide that details the implementation of climate-related disclosures, with best practices that are in line with the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD); and
   o A series of workshops to build capacity in green finance, with support from the industry associations.

I am heartened that IMAS has been one of the strategic partners working with MAS on this front.
• We greatly appreciate IMAS’ support of the industry’s efforts towards greater sustainability.
• We strongly encourage all fund managers to make full use of these resources and apply greater mindshare to proactively manage the environmental risk in their portfolios.

Let me now touch on the second topic of liquidity risk.

STRENGTHENING FUND RESILIENCE TO LIQUIDITY RISK

Against the backdrop of market uncertainties, effective liquidity risk management remains critical.

When the COVID-19 shock hit financial markets in March 2020, broad risk-off sentiment resulted in a flight to cash and high quality assets.
• The market fall-out impacted price discovery in a wide range of asset classes, notably fixed income [5] , and caused severe strains to money market funds.

By and large, Singapore’s asset management sector has been relatively resilient but we remain vulnerable to further shocks.
• Renewed waves of COVID-19 could derail the global recovery [6] .
• Inflationary concerns have sparked market sell-offs in recent weeks.

These market gyrations underscore the need to continue monitoring and managing liquidity risk prudently.
• This is especially pertinent for funds with daily dealing arrangements, and those that invest in less liquid assets.

Allow me to share with you three areas where we are making progress.

One, MAS has been working with the industry to progressively enhance fund monitoring and surveillance efforts.

Since April 2020, more than 100 reports for authorised funds that experience single-day net redemptions exceeding 5% of AUM have been filed with MAS.
• This reporting serves as an early warning mechanism for significant fund outflows, and the potential impact to investors.
• Several redemptions were driven by chunky outflows from institutional clients.
   o This underlines the importance of monitoring investor profile given its direct implications on liquidity demands.
• Some fund managers also activated swing pricing amidst higher redemption volumes, while others did not have such mechanisms in place.
   o Fund managers should consider the use of such measures in exceptional circumstances, and assess how swing pricing accords with ensuring equitable treatment of investors, including those who remain invested in the fund.

On the asset side, funds invested in certain asset classes such as fixed income have also been impacted by valuation pressures.
• The impact of credit deterioration and rating downgrades bears watching amidst the challenging economic environment.
• We have surveyed some of the larger fund managers to better understand the credit and liquidity profiles of their fixed income funds and segregated mandates.

Let me highlight two high-level observations:
• First, should rating downgrades occur, forced asset sales may be necessary to adhere to investment restrictions, thereby aggravating stresses in the fixed income markets.
   o Fund managers should assess if pre-emptive position resizing may be necessary to mitigate the impact of credit deterioration on their portfolios, especially if investment mandates afford limited flexibility to hold non-investment grade securities.
• Second, level 2 and 3 assets, which are generally considered less liquid, constituted the bulk of fixed income holdings across the surveyed portfolios.
   o Closer attention should be paid to funds with significant holdings of such assets, particularly daily dealing funds that are inherently exposed to greater risks of asset-liability mismatches.

Two, MAS has commenced a liquidity risk management and valuation thematic inspection of selected fund managers.
• Preliminarily, we found that fund managers have generally considered liquidity risk at the product design stage and ensured that dealing frequency took into account the liquidity profile of the underlying investments.

However, there are some areas for improvement.
• First, the assumptions used in proprietary or third-party liquidity risk models were generally not adjusted to take into account market dislocation in 2020.
   o Some fund managers are cognisant of the limitations of their existing models and have implemented supplementary measures to address the shortcomings while others have not.
• Second, there is varying frequency of liquidity risk monitoring, with some fund managers monitoring on a daily basis, while others do so less frequently, such as on a monthly basis.
   o The ability to increase the frequency of monitoring will be important for more proactive management of liquidity risk in times of stress.

We will share further on the key observations with the industry when we have completed the thematic inspections.

Three, MAS will continue to step up our monitoring of fund liquidity risks.
• We are looking to extend the reporting of significant redemptions beyond authorised schemes to non-retail funds.
   o Our focus will be on non-retail funds managed by our fund managers for a start.
   o Significant redemptions or disorderly liquidations in this space could have reputational impact on the fund manager, or broader spill-over effects on our local asset management sector.
• We will also standardise the reporting of fund gating and suspensions via a Fund Gating and Suspension Report.
   o This will facilitate a consistent set of information for monitoring.
   o As gating and suspensions restrict investors' access to capital, this report aims to size up the impact to investors, taking into account steps taken by fund managers to safeguard their interests.

Moving on to my third topic of LIBOR transition.

DEVELOPING EARLY READINESS FOR LIBOR TRANSITION

FIs in Singapore should be prepared well ahead of end-2021 for the discontinuation of LIBOR and correspondingly SOR, which uses USD LIBOR in its computation.
• I would like to call on the industry to continue to prepare for the transition in terms of staff, systems and processes.
• Fund managers should track your progress closely and cater sufficient buffer to address unanticipated delays.

MAS has been actively engaging the industry to emphasize the importance of early preparation and take stock of FIs’ transition.
• We note that fund managers are at varying stages in terms of implementing the necessary changes to their products, systems, and processes.
   o Not all have completed their stocktake of the fallback arrangements for their legacy LIBOR and SOR contracts.
• Some fund managers are also largely reliant on counterparties to determine the alternative reference rates, with a number adopting a passive “wait and see” approach.

This mindset needs to change and fund managers should take a more proactive approach to avoid contract frustration and settlement issues.
• It is also important to put in place adequate communication plans.
• This would include providing investors with appropriate information on how changes to fund benchmarks may impact the way the funds are managed and performance fees are computed.

The majority of the exposure for funds stems from holdings of OTC derivatives.
• MAS strongly encourages fund managers with LIBOR or SOR derivatives transactions to adhere to the ISDA Fallback Protocol.
• Those with funds that have relevant cash market exposures should closely monitor the contractual fallbacks being developed for loans, floating rate notes, securitisations and other products.
   o In addition, fund managers should engage respective issuers on their transition plans to avoid any uncertainty upon LIBOR cessation.

To guide the industry, MAS has developed a set of transition timelines that fund managers should adopt in their benchmark transition plans and execution.
• We have issued a circular last month providing more details on the respective target timelines.
• We will continue to work closely with the industry to monitor progress in preparing for the discontinuation of LIBOR, as well as SOR and SIBOR.

Finally, let me say a few words about remote working.

ENHANCING OPERATIONAL RESILIENCE IN A REMOTE WORKING ENVIRONMENT

COVID-19 has resulted in businesses around the world having to adopt work-from-home arrangements on a scale and at a speed that were unprecedented.
• In Singapore, the Multi-Ministry Taskforce has recently announced heightened measures to arrest the number of community infections.
• Significant work-from-home or remote working arrangements will likely continue in the foreseeable future.
• FIs have also recognised the need for their operations to be pandemic-resilient in the longer term, in which remote and hybrid work arrangements will play a role.

Remote working requires changes to policies and operational processes, some of which could lead to new risks and risk management challenges.
• It is important that fund managers consider and monitor remote working risks closely to take pre-emptive steps to mitigate them.
• MAS and the Association of Banks in Singapore have jointly published a paper in March this year on “Risk Management and Operational Resilience in a Remote Working Environment”.
   o The paper aims to raise awareness of key remote working risks in the financial sector, and shares good practices adopted by FIs to mitigate some of these risks.
   o I strongly encourage all fund managers to leverage on the paper to adopt good practices on risk mitigation.

Let me briefly outline some of the key risks of remote working.
• First of all, large-scale adoption of remote working has changed the overall control environment in which staff perform their roles.
   o Fund managers should review their working arrangements to identify risks from changes in control environment and processes.
   o You should also assess the operational resiliency of third party vendors and implement appropriate contingency plans to ensure continuity of services.
• Next, to facilitate remote working, fund managers may have allowed remote access to applications and systems, as well as sensitive information.
   o Fund managers will need to continue to adopt robust technology risk management practices and strengthen controls to mitigate the heightened risk of information loss and cyber attacks.
   o You will also need to ensure that your staff’s remote working infrastructure is secured.
• Lastly, remote working could also impact an organisation’s people and culture, and this has to be managed intentionally.
   o The lack of face-to-face interactions may, over time, dilute team cohesion and shared norms.
   o Fund managers should pay attention to these areas and explore ways to build strong corporate culture and conduct in a remote or hybrid working environment.

CONCLUSION

2020 has been a wake-up call but it has also given us an opportunity to reflect on past lessons and urgent actions needed going forward.
• Recent events have further made clear that the external environment remains fast-changing, with potential downside risks.
• The industry needs to remain vigilant and be prepared for possible contingencies.

Let me conclude on a positive note.
• Singapore’s financial sector has shown remarkable agility and resilience despite the significant challenges posed by the pandemic.
• The asset management industry in particular has adapted swiftly to cope with the many disruptions faced.
• In doing so, you have put yourself in a strong position to not just enhance resilience but also to seize the opportunity to build back better post-COVID-19.

To this end, MAS will continue to maintain an open channel with the industry and to collaborate and support the industry in navigating the risks and challenges ahead.

On this note, let me thank IMAS once again for organising this event and I wish you a fruitful session this afternoon. Thank you and stay safe.

1. [6] IMF more upbeat on global economy, but warns new Covid variants could derail growth, CNBC (Jan, 2021)