Maltese retail investment funds can withstand worst-case redemption requests – MFSA Report

The Malta Financial Services Authority has published a report titled “Liquidity Stress Testing for Maltese retail funds”. This report, which was authored by Francesco Meglioli and Stephanie Gauci, gives various insights of how stress and adverse conditions impinge on investment funds and how they are affected from a liquidity perspective.

One of the key findings of the report is that from the micro-level liquidity stress test it emerged that the majority of Maltese retail funds that formed part of the sample hold enough highly liquid assets to withstand three different levels of worst-case redemption requests without incurring material liquidation losses.

From the macro-level liquidity stress test, it emerged that most of the Maltese retail fund strategies hold a cash buffer well above the redemption scenarios generated by stressing the macro-economic environment.

The Financial Stability function within the MFSA developed its own stress testing framework which takes the name of Stress Testing for Investment Funds Framework (STIFF).  This is the Authority’s first liquidity stress testing framework, both at micro and macro levels. The report covered an analysis of 64 retail investment funds which had a diverse range of investment strategies, asset classes and assets under management.

“The significant growth experienced by the investment fund industry over the last decade has heightened the relevance of this sector from a systemic risk viewpoint.  The European Central Bank (ECB) recognised that investment funds are becoming riskier and less liquid by increasing their asset allocation to lower-rated and high-yield securities. For this reason, it has become increasingly important and essential to test the resilience of investment funds and their financial stability implications in times of market stress,” said Joseph J. Agius, Head, Financial Stability at the MFSA.

The micro-level stress test was conducted to assess the resilience of the individual investment funds to extreme but plausible weekly redemption shocks. Macro-level stress tests are used to gauge a deeper insight on how the macro-economic environment can affect the liquidity profile of the Maltese fund industry while also identifying the types of funds most exposed to macro-economic shocks.  

Looking ahead, the MFSA’s Financial Stability function intends to perform further micro and macro-level stress tests on an ongoing basis and to integrate this study in the Authority’s Financial Stability cycle, given the importance of liquidity management in the investment fund space.

The full report may be found on the MFSA’s website under the section Financial Stability – Research and Publications.