Liquidity risk has been in the spotlight in recent times following changing regulation for liquidity ratios. Next on the agenda is the new Securities and Exchange Commission (SEC) rule 22e‑4 on liquidity risk and, last year, two vendors pooled resources to offer a solution to this issue for their joint customer base. IHS Markit and MSCI have scored a winning goal after integrating fixed-income market and liquidity data—an effort that has seen the vendors awarded Most Innovative Market Data Project.
The SEC’s rule 22e‑4 requires mutual funds and other open‑ended funds in the US to establish liquidity risk management programs—hence introducing classification of liquidity of investments.
To help clients comply with this new rule ahead of the upcoming deadline, IHS Markit and MSCI teamed up by adding fixed-income data from IHS Markit to MSCI’s LiquidityMetrics—a multi-asset-class liquidity risk measurement framework—thus creating a powerful combination of risk models and analytics with integrated pricing and liquidity data.
Dan Huscher, managing director of fixed-income product development at IHS Markit, says with the proposal of the SEC rule 22e‑4, the vendor realised its existing liquidity offering needed to evolve to include time to liquidation and estimates of potential price movements that firms would need to comply with the new regulation. “We’ve traditionally had a liquidity scoring model, but it didn’t provide specific metrics on how long it would take to exit a position,” he says, explaining that when working with MSCI the two companies discussed which metrics IHS Markit could create for improving the estimation of price impact.
IHS Markit and MSCI decided to collaborate as each possessed the pieces of the puzzle that the other sought for assessing liquidity of assets in line with the new SEC rule—IHS Markit had fixed-income data, while MSCI had the liquidity risk model. Carlo Acerbi, managing director and head of risk management research at MSCI, says the two vendors realized it was a perfect match. “This marriage took place in September 2017, and ever since we’ve been marching together and showcasing what we can do jointly,” he says, adding: “With IHS Markit we achieve what we believe is cutting-edge technology.”
It was the “innovative partnership” that set IHS Markit and MSCI apart in the category, according to the judges, who added that it is “hard to beat these behemoth providers.” Considering “the near collapse of the financial industry 10 years ago,” the judges added that the “industry must continue to innovate and understand risks, liquidity and concentrations.”
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