The European Securities and Markets Authority (ESMA) has published a consultation paper (Consultation Paper) (found here) providing a set of proposed guidelines on how liquidity stress testing (LST) should be applied by alternative investment funds (AIFs) and Collective Investment in Transferable Securities (UCITS), in response to the recommendations set out by the European Systemic Risk Board (ESRB) in April 2018 (found here).
The ESRB recommendations aim at developing guidance on the practice to be followed by managers for the stress testing of the liquidity risk for individual AIFs and UCITS. The ESRB encouraged ESMA to establish common practice guidelines for managers in respect of the design of LST scenarios, the LST policy, considerations for the asset and liability sides of investment fund balance sheets and the required timing and frequency of LST. The proposed guidelines set out in the Consultation Paper aim at promoting convergence in the way national competent authorities supervise fund LST across the European Union (EU).
LST is a process carried out by fund managers, the aim of which is to test the resilience of funds in respect of a variety of market risks, including liquidity risk which is an existing requirement under the Alternative Investment Fund Managers Directive (AIFMD), the Money Market Funds Regulation (MMFR) and UCITS. The Consultation Paper sets out the fund managers’ practical considerations and minimum standards to be taken into account in order for them to improve their LST procedures.
The proposed guidelines are applicable to managers of UCITS and EU Alternative Investment Fund Managers (AIFMs), EU depositaries overseeing UCITS and EU AIFs. The draft guidelines also clarify that exchange traded funds (ETFs) and money market funds (MMF) are also within scope. The draft scope also proposes that leveraged closed ended AIFs be in-scope consistent with obligations of such funds under the AIFMD. The contents of the Consultation Paper should further be of interest to trade associations, investors and consumer groups relating to UCITS and EU AIFs.
ESMA invited the comments and suggestions of relevant parties on all matters raised in the Consultation Paper, which will be published following the close of the consultations, unless the parties indicate otherwise. ESMA will review all comments received by 1 April 2019.
If you have any questions, please contact Marina Stavrou, Andrea Moundi Savvides or your usual Harneys contact.