Apr 29, 2025
Liquidity contingency plans (LCPs) are part of a broad range of liquidity risk management (LRM) strategies, tactics and tools that are employed by fund managers from around the world within their funds management activities. There is a strong connection between LCPs and the stress-testing of liquidity management tools (LMTs) used within LRM practices. In this article we shall first examine the origins and objectives of LCPs and then outline practical considerations relevant to drafting up a basic LCP.
A. The New Zealand situation
In April 2024 the Financial Markets Authority (FMA) published its Liquidity risk management guide (2024 Guide) as an update on its April 2020 good practice guide Liquidity risk management (2020 Guide). Both documents are aimed at specifying LRM practices for New Zealand-domiciled managed investment scheme managers, including KiwiSaver managers (MIS managers). The 2024 Guide was promoted by the FMA at launch as replacing the 2020 Guide, but in many ways it simply repeats what the earlier document had already stated. A major difference between the two documents is that the 2020 Guide advances 11 Principles of LRM whereas the 2024 Guide promotes 11 Features of LRM. The change from Principles to Features signifies that the regulator is viewing LRM requirements as imperative rather than aspirational.
In particular, Feature 3 – Contingency plans of the 2024 Guide (pp. 11-2) restates almost word-for-word Principle 10 – Contingency plans of the 2020 Guide (p. 16). Accordingly, LCPs do not represent a new idea within New Zealand’s financial regulation landscape, with the concept having been around for at least five years in our country, and there are some LCPs in existence already. Perhaps, however, the upgrade of the LCP requirement placed upon MIS managers from a Principle to a Feature and the placement of this Feature higher up in the pecking order in ranking as number 3 instead of as number 10 has focused minds on what LCPs are supposed to be and do.
In the 2024 Guide, Feature 3 is stated as follows:
The Manager has a formal liquidity contingency plan (LCP) that clearly sets out its strategies for addressing liquidity shortfalls in emergency situations.
a. Outlines policies to manage a range of stress environments.
b. Establishes clear lines of responsibility.
c. Includes clear initiation, escalation and withdrawal procedures.
d. Is regularly tested and updated to ensure it is operationally reliable.
3.2 The LCP:
3.3 The Manager understands the legal basis and requirements for the appropriate use of each LMT it intends to deploy as part of its LCP. This includes knowing in advance what information must be provided to investors, the Supervisor and the FMA, and being able to act quickly and with assurance.
(2024 Guide, pp. 11-2)
The 2024 Guide’s Feature 3 echoes the 2020 Guide’s Principle 10 in setting out at the beginning that LCPs are pre-existing emergency plans for dealing with liquidity shortfalls potentially arising for managed funds (including KiwiSaver funds). Accordingly, although in practice LCPs may rarely, if ever, be used, nonetheless they must be entirely ready in advance to be successfully activated as and when needed without fail. It is far too late to be devising an LCP on the brink of an unfolding financial market or managed fund liquidity event, let alone in the midst of a full-blown liquidity crisis.
A MIS manager who has not yet embedded an LCP into its LRM operational practices risks being entirely unprepared for when a liquidity shortfall emergency (LSE) event strikes its managed funds and is fully exposed to adverse consequences arising therefrom, including breaches, for both itself and its scheme members. The FMA makes its own attitude to MIS managers having LCPs that are all set up and good to go abundantly plain where it states in Feature 1 – Overarching framework and strategy that, “The Manager has a documented process for identifying and managing liquidity risk, supported by robust contingency planning” (ibid., p. 10).
Sub-feature 3.1 provides a short laundry list of what an LCP should contain by way of policies, responsibilities, and procedures and comes with a requirement, similar to that for a business continuity plan (BCP), that an LCP should be subjected to regular testing and updating to demonstrate its operational effectiveness. This requirement for LCP testing segues into Feature 8 – Stress testing (2024 ibid., p. 17-8). Sub-feature 8.3.c expressly links LMT stress testing to the formulation of LCPs, using much the same language as the corresponding point to be found in Principle 8 – Stress Testing of the 2020 Guide (p. 13):
Help formulate action and contingency plans to deal with plausible stressed market conditions using different LMTs.
(ibid., p. 17)
Sub-feature 3.2 introduces LMTs and divestment strategies into the mix, thereby drawing Feature 7 – Liquidity management tools (ibid., pp. 15-6) into the heart of the LCP context. With Feature 7 comes the FMA’s desire that MIS managers prudently and sequentially deploy appropriate selections of graduated-impact LMTs as necessary to meet managed fund liquidity shortfalls, ranging from least severity on investors, such as temporary changes to unit pricing practices, and right up to the final extreme of suspending redemptions. Sub-feature 3.3 again implies Feature 7 but also implicitly introduces Feature 5 – Disclosure and communication (ibid., p 13). Thus Feature 3 of the 2024 Guide is linked to other Features – 1, 5, 7, and 8 – and any attempt to write an LCP should take the various requirements of those additional Features into account.
B. Theoretical origins of LCPs
Of course, the FMA did not all by itself invent the need for MIS managers to have LCPs. The LCP concept originated with the Financial Stability Board (FSB) in explanatory text for Recommendation 6 of a 2017 paper entitled Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (Policy Recommendations). This text makes an explicit linkage between liquidity stress testing of managed funds and LCPs:
Stress test results should be used by the asset manager to assess the liquidity characteristics of the fund’s assets relative to the fund’s anticipated redemption flows under stressed market conditions and to tailor the fund’s asset composition, liquidity risk management, and contingency planning accordingly. The relevant authorities could also monitor the extent to which stress testing results are being considered as a key input to calibrate holdings of liquid assets, the use of the fund’s liquidity risk management tools, and contingency plans.
(Policy Recommendations, p. 20)
This recommendation led to the International Organisation of Securities Commissions (IOSCO), of which the FMA is a member, promulgating in a 2018 paper entitled Recommendations for Liquidity Risk Management for Collective Investment Schemes (LRM Recommendations) the following two recommendations intended to usher LCPs officially into the LRM practices of fund managers:
Recommendation 16
The responsible entity [i.e., the fund manager] should put in place and periodically test contingency plans with an aim to ensure that any applicable liquidity management tools can be used where necessary, and if being activated, can be exercised in a prompt and orderly manner.
Recommendation 17
The responsible entity should consider the implementation of additional liquidity management tools to the extent allowed by local law and regulation, in order to protect investors from unfair treatment, amongst other things, or prevent the CIS [i.e., the collective investment scheme] from diverging significantly from its investment strategy.
(LRM Recommendations, pp. 18-9)
It is no coincidence that the FMA referenced both of the Policy Recommendations and LRM Recommendations in the 2020 Guide (p. 4).
Recommendations 16 and 17 are reiterated in a 2023 IOSCO paper entitled Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes Final Report (Final Report), wherein LCPs are further recommended within a concise description of what they should be and how they should be connected with stress testing of LMTs:
Contingency plans (e.g., specific operational arrangements for stressed market conditions) should also be in place and tested periodically to ensure LMTs can be used in a prompt and orderly manner.
(Final Report, p. 20)
The Final Report is referenced by the FMA in the 2024 Guide (p. 7). Thus, it can be seen that LCPs have quite a long intellectual pedigree within the official theories of worldwide financial markets regulation dating back at least to 2017 and connecting the FMA with the FSB and IOSCO in the international project of developing LRM policies and more particularly LCP implementation.
An LCP is a critical LRM document that a MIS manager should develop and maintain as part of its normal routine business practices. The LCP could be embedded within wider LRM documentation, but our practical recommendation is that, given the typical length, complexity, and detail required for even a basic LCP, the plan should exist as a separate, standalone document readily accessible for immediate operational implementation as and when required. In times of urgency when an LCP is activated, the plan’s users will not be wanting to rifle through screeds of surrounding documentation in order to find it. Also, in our observation, LCPs that are embedded in wider LRM documentation tend to be cursory to the point where it is doubtful that they could be operationally reliable in that truncated state.
In this section of the article, we shall consider what might be required at headline level in order for a MIS manager to draft up a basic LCP that could serve as a starting point for this aspect of LRM. Obviously, in practice the LCP would need to be cut and tailored to fit exactly the particularities of the MIS manager’s own schemes and funds, and the types of assets and financial markets invested in, as there will be no single generic LCP that is reliably one-size-fits-all across MIS managers.
In writing up an LCP, it must be remembered that it is intended to be a fit-for-purpose internal operational document that will be referred to by multiple persons within the MIS manager who are acting under urgency when an LSE event occurs that affects the MIS manager’s schemes and/or funds. Accordingly, the LCP should be laid out and organised logically under topical headings or chapters. Language used throughout the LCP should be clear and concise and in no part ambiguous or confusing in any way. Consideration should be given to using tables, diagrams, and flow charts to illustrate LCP operations and processes as appropriate. Checklists should be provided to assist staff in carrying out their tasks during LCP activation, escalation, and withdrawal phases. The LCP should stand ready for immediate, efficient, and effective activation as and when required.
It is important that LCPs are functionally well integrated with LMTs and statements of investment policy and objectives (SIPOs), as these three critical components of funds management operations need to be aligned with and mutually supporting of each other.
LCP headings or chapters can include:
In what follows, we shall consider what might fall under each of the above headings.
Introduction
The initial section of the LCP can provide a brief summary of the document to follow. This summary could prove useful to first-time readers of the LCP, enabling them to understand quickly and at a high level what operational needs and requirements the document is intended to meet.
Schemes and funds to which the LCP applies
This section should specify all the MIS manager’s schemes and funds to which the LCP applies. Rather than appear at this stage of the LCP, the section could be attached as an appendix, but if that is the case, then the LCP needs to refer explicitly to the existence of the appendix as its supplementary companion document so that the reader knows to refer to the latter.
Purpose of the LCP
This next section can provide a formal statement of the operational purpose of the document. The relationship of the LCP to the rest of the MIS manager’s LRM practices, including normal day-to-day liquidity management, can be contextualised. The MIS manager’s strategies for addressing in a prompt and orderly manner LSE events that may affect its schemes, funds, investable assets, and investment strategies can be set out.
Conditions under which the LCP should be activated
This part of the LCP can set out the conditions for activation of the plan. Liquidity stress environments and scenarios can be described that could plausibly impact relevant financial markets and the MIS manager’s schemes, funds, investable assets, and investment strategies under both normal and abnormal market conditions. The MIS manager’s policies applicable to liquidity problems caused by these environments and scenarios can be set out. The LCP’s relationship to the SIPO of any scheme or fund that the plan applies to can be described here.
Also included can be descriptions of early warning indicators (EWIs) that could prompt the MIS manager to go on alert for prospective activation of the LCP. Which EWIs are appropriate to refer to will depend upon the investment strategy of the MIS manager and the specifics of the investable assets and markets to which the strategy is applied. Subject to that caveat, EWIs could include:
Criteria, rules, and procedures for authorisation of LCP activation can be described at this point, including identifying who has the authority to provide such authorisation, who will seek that authorisation and how, and the mechanism by which the authorisation will be provided such that LCP activation can promptly take place.
Activation, escalation, and withdrawal
The LCP should be very clear and precise about the scope and application of its permitted activities under activation, escalation, and withdrawal. This includes criteria, rules, and procedures for actions in activating, escalating, and withdrawing from any LCP-related operational activities, including any legally required notifications to and/or prior written approval from relevant external parties such as the Supervisor and/or the FMA. Under this heading, the LCP can be broken down into three subheadings:
Activation
The policies, procedures, and activities entailed in activation of the LCP can be included here. This can cover the actions required and who will perform them, along with the relevant internal reporting lines, including the “hands-on” staff who are directly managing the activation, any other persons in the organisation who need to be informed in order that they can act to support the LCP’s activation and what their responses are required to be, and any formal notifications or prior written approval requests to be provided to senior management, the Board of Directors, and any external parties such as the Supervisor or the FMA.
Escalation
This is the place for the policies, procedures, and activities related to escalation of the LCP. Escalation in this context can mean more than one thing:
Internal escalation
Internal escalation within the MIS manager concerns communications with the MIS manager’s staff and Board of Directors on how the LCP activation is proceeding. Criteria, rules, and procedures can be set as to the form, content, frequency, and recipients of these communications. Internal escalation procedures can include reporting of any incidents, breaches, miscarriages, unintended consequences, and unexpected events arising during the course of an LSE event and the LCP activation undertaken in response. For example, senior management and/or the Board of Directors may need to be notified under urgency and entries made into incident or breach registers. Breaches would need to be examined promptly to determine if they were material and required formal notification to the Supervisor and/or the FMA. Templates could be prepared in advance for LCP-related internal escalation communications.
External escalation
External escalation involves the communications strategy of the MIS manager with respect to external stakeholders such as the following:
Communications can cover explanations of the precipitating LSE event and the LCP that has been activated in response, which schemes and/or funds have been affected, in what manner and for how long, how and why LMTs are being or will be applied to manage the LSE event, what these LMTs are, how they work, and the duration and intended effects of their applications, when the LMTs might be withdrawn, what the schedule for regular communication updates will be, and how stakeholders can gain further information, including relevant MIS manager contact details. Where relevant, the role of the Supervisor can be noted and explained in relation to LCP activation or the MIS manager’s use of specific LMTs such as managed fund withdrawal suspensions, for which latter action Supervisor permission may be required under applicable Trust Deeds clauses. It could be appropriate that different stakeholders, depending on who they are, will need different types of communications and different points of MIS manager contact for further information. Templates could be prepared in advance for LCP-related external escalation communications.
Withdrawal
At some point the LSE event will end, at which stage the LCP can be withdrawn when appropriate. The criteria, rules, and procedures for undertaking withdrawals can be formulated, including specifying the authority required to effect a withdrawal and the monitoring requirements for the post-withdrawal period. The escalation section above could have relevance to the withdrawal phase of LCP management in respect of both internal and external communications.
LMTs
The LMTs available for a MIS manager to deploy under an LCP can be documented in detail within the plan, including their titles and descriptions of their purpose and design, why they are appropriate for the schemes and funds that they can be applied to, what their triggers for application are, whether their application requires prior consent from the Supervisor and/or the FMA, how they work in practice, the length of time that they can be applied for, what their intended consequences are, what potential risks they may pose when applied or not applied, how they will impact financially upon fund investors and scheme members during the period of their application, and how and when they can be withdrawn.
Divestment strategies deployed as LMTs can be described within this section of the LCP, including the criteria, rules, and procedures for their use and the sequencing of their application, and the particular divestment approaches to be taken such as pro-rata or ‘slicing’. Explicit consideration can be given to how divestment strategies exercised under an activated LCP could integrate with the applicable SIPO, including managing the risk of material limit breaks occurring.
All LMTs included under an LCP should be subjected to regular and ad hoc stress-testing as required under the 2024 Guide in its Feature 8 and the results of this stress testing can be used to help formulate the LCP as recommended under sub-feature 8.3(c) (p. 17). The LCP can state the selection rules and criteria for LMTs deployable under it, including for addition and removal of LMTs.
Care should be taken to ensure that any LMTs included under an LCP are compliant with and do not breach the MIS manager’s licence, governing documents such as Trust Deeds, disclosure documents such as Product Disclosure Statements (PDSs) and Other Material Information documents (OMIs) (for example, a PDS’s rules around withdrawals), SIPOs, applicable external legislation and regulations (for example, section 143(1)(b) of the Financial Markets Conduct Act 2013 (FMC Act)), fair dealing requirements (for example, MIS managers’ public-facing website content), and any MIS manager obligation to seek prior written consent from the Supervisor before deploying particular LMTs.
Roles and Responsibilities
This important section of an LCP can be used to set out the roles and responsibilities of the MIS manager’s staff (e.g., Investment Committee, CIO, CEO, Operations, Compliance, Communications, Public Relations, Legal, etc.) and Board of Directors in relation to the plan. Various areas of responsibility and the roles and persons responsible can be addressed, including, but not limited to:
The responsibilities section should not just be a laundry list of who does what, but should make clear what the reporting lines are and how the roles and people included within it are supposed to function together in an integrated way to interact constructively, collaboratively, and interdependently to help ensure that a real-world LCP activation in response to an LSE event can have the best possible chances of success and the most positive outcomes.
LCP post activation review
A procedure can be described where, after each withdrawal of an LCP subsequent to the conclusion of an LSE event, a suitably qualified person conducts a beginning-to-end review of the operations involved and the results they achieved (or failed to achieve) from a best-practice, continuous improvement perspective. This review can lead to a report to relevant parties in the MIS manager and include recommendations for updates, enhancements, and refinements to the LCP and the LMTs it relies upon.
LCP testing
The LCP testing section can include a description of the testing cycle frequency to be applied to the LCP, both regular and ad hoc, what is to be tested, how testing will achieve an objective standard that is robust and credible, what kind of results are to be expected from a successful test, who is responsible for undertaking the testing, integration of LMT stress-testing with LCP testing, assurance procedures for establishing LCP operational reliability, who receives reports on the results of the LCP testing and assurances up to and including senior management and the Board of Directors, and what special procedures apply if testing throws up adverse results such as indicating the probability that the LCP will fail in a real-world LSE event. A model to start from for LCP testing could be the MIS manager’s existing business continuity plan (BCP) testing.
The requirement for testing can be regarded as a good quality control for how an LCP is drafted. In reading an LCP, the question can be asked, “How readily testable is what has been written in this document?” Moreover, if an LCP has been written in such a way that it is not clear how testing it will lead to sound assurance concerning the operational reliability of the plan, then there is an urgent problem to address.
LCP CAP testing
The LCP should be included within the ambit of the MIS manager’s ongoing compliance assurance programme (CAP) testing and reported on via that avenue to senior management and the Board of Directors/Audit and Risk Committees.
Document drafting, approval, and review
The LCP can have a self-referential section, i.e. Document Control, in which it states who is responsible at the MIS manager for drafting, peer reviewing, signing off, storing, retrieving, distributing, and subsequent reviewing of the LCP, as well as the frequency of ongoing LCP reviews, including regular and ad hoc reviews. The LCP can include a controls section listing who has drafted, reviewed, and approved it with dates provided, and the dates of last and next review. Review frequency could be linked to the review cycle of another relevant document such as a SIPO. The LCP could state that the Supervisor of the MIS manager should be provided with the current copy of the LCP when available.
Summary
The above list of potential topics for a basic LCP to address is not intended to be comprehensive, exhaustive, or prescriptive. It is entirely up to MIS managers to come to grips with the requirement for an LCP appropriate for their schemes and funds as set out in the 2024 Guide. MIS managers should feel free to approach their Supervisors for recommendations and suggestions on how they can apply a best-practice, continuous improvement approach to creating or revising their LCPs. Supervisors have a direct interest in their MIS manager clients being fully armed and prepared in advance with effective LCPs for activation when LSE events arise.
Conclusion
“LCPs are critical operational documents and normal routine business requirements for MIS managers, including KiwiSaver managers, to have ready to hand to activate whenever LSE events should happen to hit their managed fund products,” said Matthew Band, General Manager of Trustees Corporate Supervision at Trustees Executors.
“Not having a fit-for-purpose LCP in place means that a MIS manager is exposed to breaches and at risk of not responding lawfully and effectively to an LSE event, for example in potentially breaching the FMC Act with respect to failure to act in the best interests of scheme participants and treat them equitably.”
“Arguably, having an LCP is implicitly required under the MIS manager’s licence, in particular standard conditions 2 and 6.”
“In respect of standard condition 2, an LCP could be regarded as an extension of a SIPO, with the same requirements applying to the MIS manager under the LCP as are imposed under the SIPO.”
“LCPs are not novel, as is evidenced in our article by analysis of reports and guidances published by the FMA, the FSB, and IOSCO dating back to 2017.”
“Since April 2020, LCPs have been recommended as LRM best practice documents by the FMA, and this was officially reiterated in April 2024.”
“MIS managers should engage constructively with their Supervisors over the former’s preparedness to meet LSE events with appropriate operational responses as set out in detail within their LCPs.”
“No doubt there are MIS managers who have excellent, regularly tested LCPs at their disposal, as is expected managed funds industry best practice.”
“For those MIS managers who have yet to produce an LCP, or who have not recently tested their existing LCP, we would respectfully suggest that it is now timely to undertake that work.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matthew Band at [email protected].