On September 18, the Canadian Securities Administrators (CSA) published Staff Notice 81-333 Guidance on Effective Liquidity Risk Management for Investment Funds (Guidance) to help funds develop and maintain an effective liquidity risk management (LRM) framework. The Guidance is intended primarily for investment funds subject to National Instrument 81-102 Investment Funds (NI 81-102), but the CSA believes the practices and examples discussed in the Guidance may be relevant to other funds as well.

The Guidance summarizes key international regulatory developments in this area and the applicable Canadian securities framework. Under Canadian securities legislation, IFMs must establish and maintain an effective LRM framework and exercise due care, skill and diligence in managing the liquidity of their funds.

The Guidance discusses five key elements of an effective LRM framework:

  • Strong and effective governance;
  • Creation and ongoing maintenance of effective LRM processes;
  • Stress testing (which is not specifically required under Canadian securities regulation but is encouraged);
  • Disclosure of liquidity risks; and
  • Use of LRM tools to manage potential and actual liquidity issues.

The Guidance also sets out six principles (LRM Principles) and related implementation strategies for investment funds to consider in connection with their creation and maintenance of effective LRM processes:

  1. At the design stage and on an ongoing basis, align the fund’s investment objectives, strategy, and redemption policy with the liquidity profile of the fund’s underlying portfolio assets and the redemption demands of the investor base.
  2. Create and adhere to robust policies and procedures that integrate LRM considerations.
  3. Perform active, ongoing portfolio monitoring using qualitative and quantitative metrics to ensure adequate levels of liquidity exist to meet redemption needs and other obligations. All relevant data should be used to actively manage liquidity risks.
  4. Set internal liquidity thresholds and targets that management of the fund can use to assess the liquidity profile of a fund and make any necessary adjustments.
  5. Report material liquidity events in a timely manner for consideration by relevant personnel of the IFM.
  6. Where possible, identify emerging liquidity concerns and potential liquidity shortages.

The Guidance also emphasizes that effective LRM approaches will vary, depending on the fund’s characteristics, and that the Guidance is not intended to suggest or endorse a “one size fits all” approach. If you would like to discuss the application of the Guidance to your business, please do not hesitate to contact us.

September 30, 2020