SD-07.3 — Liquidity Risk Management

Business Domain: BD-07 Investment Risk (Middle office) · Applies: BOTH

Purpose

Measures the portfolio’s ability to meet its obligations without forced sales, and the liquidity of its holdings under stress. Liquidity risk is distinct from market risk: market risk is the loss from prices moving; liquidity risk is the inability to transact at or near fair value when cash is needed. SD-07.3 measures both the asset side — how quickly the holdings can be turned to cash — and the liability side — the redemption, capital-call and margin demands on the portfolio. For a private-markets programme it also measures the commitment and capital-call liquidity the continuously-priced view does not see.

Service Operations

Classify holdings by liquidity — apply the SD-01.11 liquidity-tier taxonomy and placement rules to segment every holding into a liquidity tier by time-to-cash, and estimate time-to-liquidation at a transaction-cost limit. This is the authoritative per-holding liquidity classification; SD-01.11 sets the tier taxonomy, SD-07.3 produces the classification of each holding against it.
Model the liability side — redemption demand, capital-call schedules and margin obligations, and the redemption-coverage ratio.
Measure commitment and capital-call liquidity — for a private-markets programme, the unfunded-commitment liquidity risk, the capital-call coverage, and the denominator-effect interaction with a market drawdown.
Run liquidity stress testing — model stressed sales and concurrent redemption or capital-call spikes.
Monitor against liquidity limits — the highly-liquid minimum, the illiquid cap and the risk-appetite liquidity limits.

Inputs and outputs

Inputs: the SD-01.11 liquidity-tier taxonomy and placement rules (the buckets and the rules SD-07.3 applies); holdings with their liquidity attributes, trading-volume and spread data, investor and redemption data, capital-call schedules, margin terms.
Outputs: the per-holding liquidity classification, the time-to-liquidation profile, the redemption-coverage ratio and the liquidity stress results — recorded as Risk Measurement (E-19, risk_type = liquidity), consumed by SD-05.6, SD-11.2 and SD-07.7.

Entities

Consumes: Holding / Position (E-04, book = ibor for intraday measures, book = abor for period-end), Valuation (E-07, any method), Portfolio / Mandate (E-03), Classification Type & Value (E-11) for the SD-01.11 liquidity-tier taxonomy it applies; LP Commitment (PM-06) and Fund Investment (PM-09) for the commitment liquidity; the SD-01.11 liquidity-tier taxonomy and placement rules.
Owns: E-19 Risk Measurement on the risk_type = liquidity partition — the per-holding liquidity classification, funding-liquidity coverage ratios, asset-liquidity bucket-time-to-cash measures, redemption-stress results, unfunded-commitment liquidity coverage. SD-07.3 is the sole authoritative source for this partition and for the per-holding liquidity classification; SD-05.6 and SD-11.2 consume the classification, and SD-07.7 consumes for consolidated reporting.

Standards

The GARP Liquidity Risk Principles for Asset Managers; the SEC liquidity-risk-management-programme rule and its four-bucket liquidity classification; the Basel liquidity-coverage concepts as borrowed reference. No single standard spans the public and private liquidity views.

Open extensions

The boundary with SD-01.11 Liquidity Strategy & Tiering (which sets the tier taxonomy and placement rules) and SD-05.6 / SD-11.2 (which consume the classification) is recorded in the BD-01 README — SD-07.3 produces the per-holding liquidity classification (applying the SD-01.11 taxonomy) and measures liquidity risk; SD-01.11 sets the policy, SD-05.6 and SD-11.2 consume the result.