KUALA LUMPUR (March 27): Investment funds would have to liquidate in aggregate 56.13% of their assets to satisfy redemption pressures in the extreme scenario, according to a stress test exercise by the Securities Commission Malaysia (SC).

The regulator said the result showed the top three asset classes, in terms of liquidity order, each experienced liquidations in excess of 60%, namely cash and cash equivalents at 68.55%, government securities at 66.59% and equities at 61.58%.

“Collective investment schemes saw 32.64% liquidation, followed by corporate bonds/sukuk at 26.54%, primarily due to the extreme redemption scenario imposed,” SC said in its inaugural Capital Market Stability Review 2022 released on Monday (March 27).

The review outlines overall risk assessments on various components of the Malaysian capital market from Jan 1, 2022 to Dec 31, 2022 and discusses the relevant systemic risk drivers. The SC is mandated to take all reasonable measures to monitor, mitigate and manage systemic risks arising from the capital market.

It said the macro stress test exercise was conducted based on Sept 30, 2022 data where 1,105 investment funds with an aggregated net asset value (NAV) of RM553.8 billion were tested. These funds excluded those with zero NAV, with no investment asset in its portfolio, and which invest primarily in property assets.

Based on the results, SC said the utilisation of liquidity buffers remained unlikely across all scenarios including the mild redemption scenario and the moderate redemption scenario.

Assumptions in developing the scenario included the expectation that the initial redemption shock would prompt further redemptions by other unitholders. It also assumed that neither the regulator nor the trustee would intervene in terms of liquidity management practices.

“Under the extreme scenario, the macro stress test showed adequate holdings of cash and cash equivalents and equities asset classes prior to any potential use of buffers, indicating ample liquidity in the portfolio structure,” the regulator said.

“Collectively, investment funds held approximately 10.17% of Bursa Malaysia's total market capitalisation. In the extreme scenario, the SC estimated that severe disruption of the equities market is unlikely, given that redemption pressures were not expected to occur simultaneously.”

In the fixed income asset class, it said investment funds held approximately 5% of the total outstanding domestic corporate and government bonds/sukuk. SC added that the utilisation of the fixed income asset class to meet redemption was noted to be minimal, particularly for corporate bonds/sukuk, which remained lower in the liquidity order.

“The most vulnerable funds have been identified as equity and mixed assets funds due to their high exposure in equities (around 90%) and lower level of liquid assets (below 3%). This high exposure in equities coupled with the low levels of liquid assets in these funds could exacerbate the risk of fire sales in the extreme liquidation scenario.

“Nevertheless, if liquidity risk management tools are implemented adequately and in a timely manner, this risk would be mitigated,” SC said. 

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