Multi-currency investment vehicles amplify liquidity considerations because funding, trading and redemption channels behave differently across currencies. Empirical and policy work by Hyun Song Shin at the Bank for International Settlements and by Tobias Adrian at the International Monetary Fund emphasizes that market depth, settlement conventions and central bank backstops vary by currency, so a single homogeneous stress test can miss currency-specific vulnerabilities. For fund managers and supervisors, the relevant question is not whether to test at all but whether liquidity stress testing should be adapted to reflect currency-specific dynamics.
Currency drivers and testing design
Different currencies have distinct market microstructures, cross-border capital flow sensitivities and counterparty networks. That means FX liquidity and access to overnight or term funding can diverge sharply between major reserve currencies and emerging market currencies. The International Organization of Securities Commissions provides guidance that stress scenarios should include currency-specific shocks, funding squeezes and sudden changes in cross-currency basis. Nuance matters: the same percentage redemption in euros and in an illiquid local currency can cause very different market impacts because of local market depth and the availability of hedging instruments.
Consequences of inadequate frameworks
If a fund uses a single liquidity framework without currency granularity, it risks underestimating redemption mismatch, incurring forced sales in thin markets, widening bid-ask spreads and transmitting stress across borders. Households and institutional investors in smaller economies can face outsized losses when managers liquidate local-currency assets to meet global redemptions, a territorial and social consequence of poor testing. At the systemic level, cross-currency funding squeezes can amplify procyclicality and lead to persistent dislocations in the cross-currency basis, a point underscored by BIS research on global market functioning.
Practical design choices include creating layered scenarios that combine local liquidity shocks, FX settlement delays and disruptions in hedging markets; separately mapping liquidity buffers by currency; and stress-testing the interaction between funding lines and collateral in each currency. These are not purely technical exercises: legal settlement practices, local holiday calendars and time-zone overlaps materially affect execution risk and should be reflected.
In sum, the prevailing expert view is that multi-currency funds require tailored liquidity stress testing frameworks or at minimum currency-segmented scenarios within a broader program. Adopting such an approach improves transparency, reduces cross-border spillovers and better protects investors and local markets.