How Does RiskSystem Calculate Liquidity Risk?
AIFMD puts huge emphasis on liquidity management – there is a large section dedicated to this topic (articles 46-49, Level II). Article 46 states “AIFMs shall be able to demonstrate to the competent authorities of their home Member State that an appropriate liquidity management system and effective procedures….are in place”. RiskSystem calculates liquidity under Business as Usual (BAU) ie normal, and Stressed market conditions (where it is assumed that liquidity is reduced due to a market shock event). We also calculate liquidity under stressed bid-ask and stressed market size. RiskSystem takes hourly feeds of all its markets where the market bid and ask are stored. It also is important to measure and monitor the liquidity risk at each counterparty. This work is in parallel to the normal counterparty risk statistics that should be measured / monitored on an on-going basis. Therefore RiskSystem may be used to determine the cost of removing risk from the portfolio under a wide range of conditions.
Risk management of a fund of funds portfolio is particularly challenging for a number of reasons. Firstly, transparency, or the lack thereof, generally means that investors do not have a detailed information of the risk in individual funds. As such it is difficult to aggregate this lack of information into the risk of a fund of funds. Secondly, information of counterparties is also difficult to access. This means that aggregating counterparty and credit exposure is also difficult. Lastly, the liquidity of funds is always a matter of concern, especially during stressed conditions. In addition limited dealing times (quarterly etc) exacerbate liquidity issues. RiskSystem provides an integrated solution that can use fund position data (if available) or simulates the risk of a portfolio of funds under a variety of stressed scenarios or historical scenarios. This can be used to provide AIFMD compliant risk figures for a portfolio of funds.
We have a technical document available – please email firstname.lastname@example.org to receive it.