Incorporating data into liquidity risk management
Actionable value in measurement
The ability to quantitatively evaluate market liquidity across multiple asset classes delivers benefits in several capacities. Both buy-side and sell-side firms benefit from an enhanced ability to measure and monitor market liquidity risk. Liquidity metrics help meet global regulatory requirements and add value to market risk metrics for enterprise-level investment processes. Using powerful analytics to intelligently navigate market liquidity risk allows asset managers and the C-suite to answer to the important question: How easy is it to remove a trade from your balance sheet?
On the buy-side:
There are opportunities to use liquidity measurement for making optimized decisions across the enterprise. Portfolio Risk managers can use liquidity measurement to enhance stress testing, improve modeling for redemptions and subscriptions and create more robust early warning indicators. Client focus on transparency and downward pressure on fee structures also require efficient oversight. Increased insight around liquidity can support more profitable trading through better collateral management and transfer pricing.
On the sell-side:
Effective liquidity measurement allows enhanced governance and can assist in reducing or optimizing transaction costs. For example, in trading, market liquidity assessment can be used to enrich and optimize collateral management processes, haircut calibration and asset optimization. Treasury operations can refine balance sheet management with better information for cost-of-funding, transfer pricing and asset liability management decision making.
Tracking fund performance versus liquidity assessment over time
Monitoring trends in fund prices and flows and combining these with moves in the liquidity of the fund allows managers to further optimize their trading & execution strategies over and above a strategy focusing only on market risk factors.
Opportunities often exist where multiple securities give similar risk performance and hence expected return, but the cost of including these securities in the portfolio can differ considerably.
Portfolio redemption scenario modelling/Stress testing
Preparing for events which are not always expected often minimizes the impact following an actual event which causes a significant change in the portfolio structure.
Buy side - What happens if my 3 largest clients decide to redeem their investments? Sell side - If counterparty XYZ defaults, am I holding the most appropriate collateral? Can I optimize my haircuts?
