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Closure of The European Securities Markets Authority, ESMA’s consultation on Liquidity Stress Test Guidance for Investment Funds (AIFs and UCITS)

Background

  • Published on the 5th February, ESMA issue public consultation on its draft guidance regarding liquidity stress tests of investment funds – applicable to alternative investment funds (AIFs) and Undertakings for the Collective Investment in Transferable Securities (UCITS).  
  • The aim of the guidance is to promote convergence in the way national competent authorities (NCAs) supervise funds liquidity stress testing across the European Union (EU).
  • The consultation sets out 14 principle-based criteria for managers’ liquidity stress tests to follow when executing liquidity stress tests on their funds.

Impacts

  • The aim of the guidance is to promote convergence in the way national competent authorities (NCAs) supervise funds liquidity stress testing across the European Union (EU).
  • The consultation sets out 14 principle-based criteria for managers’ liquidity stress tests to follow when executing liquidity stress tests on their funds.
  • The draft principles require stress tests to:
    • be tailored towards the individual fund;
    • reflect the most applicable risks to a fund;
    • be sufficiently extreme or unfavourable (yet plausible);
    • sufficiently model how a manager is likely to act in times of stressed market conditions; and
    • be embedded into the fund’s overall risk management framework.
  • The Consultation also provides for a guideline applicable to depositaries, outlining how they should fulfil their obligations regarding liquidity stress tests. 
  • ESMA is seeking views on the guidance fund managers should follow, which include:
    • the design of liquidity stress testing scenarios;
    • the liquidity stress test policy, including internal use of liquidity stress test results;
    • considerations for the asset and liability sides of investment fund balance sheets; and
    • the timing and frequency for individual funds to conduct the liquidity stress tests.

Timeline

  • The consultation is open for feedback until 1 April 2019.
  • ESMA will likely issue a final report by the summer of 2019.