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Do the Guidelines specify what should be outlined in the LST Policy and Senior Management Reporting?

The Liquidity Stress Testing (LST) Policy

The Guidelines require the LST Policy to be drafted as part of the Risk Management Policy of the Management Company for the Scheme. As applicable to all other risk management operations, the drafting and implementation of the LST policy should be led by risk management staff which should act independently from other functions such as the portfolio management function.

The Guidelines are very specific and clear on what must be detailed in the Liquidity Stress Testing Policy. This includes the following:

• Explanation on the liquidity stress testing models utilized
• Elaboration on how the liquidity stress testing model used is validated
• Assumptions backing the stress testing model considered
• Information on the data used in the modelling such as data sources, limitations and assumptions
• The asset liquidation method utilised by the portfolio manager, its limitations and assumptions
• The frequency of LST report generation per Sub-Fund and the recipients of such reports
• The rationale behind stress testing conducted for each Sub-Fund
• The rationale behind the frequency of stress testing conducted for each Sub-Fund
• The role of senior management including the Board of Directors
• The reporting escalation procedures
• Information about periodic reviews to be conducted and how outcomes are to be documented

Senior Management Reporting

Whilst the Guidelines are very exhaustive on what should be captured by the LST Policy, they do not outline what exactly should be detailed in LST reporting made to Senior Management (including the Board of Directors).

As applicable for any risk management reporting, the appointed Risk Manager should ensure that the reporting provided clearly outlines enough information to assist the Board of Directors in fulfilling their oversight duties. The Board of Directors must be confident that the information provided illustrates the adequate performance of liquidity stress testing as required by the Guidelines and should raise any concerns on the information (or lack of) provided to them by the Risk Manager.

MFSA expectations

The MFSA expects the Manager to perform Liquidity Stress Testing by the 30th of September 2020. Furthermore, the MFSA expects to be provided with an updated Risk Management Policy within a reasonable timeframe from the implementation date of the Guidelines.

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