ESMA guidelines on liquidity stress testing for investment funds


On 2 September 2019, ESMA published the final guidelines on liquidity stress testing (LST) in UCITS and AIFs.

The final guidelines follow on consultations initiated in April 2019 and will take effect from 30 September 2020.

UCITS and AIFS (including ETFs that operate as UCITSs or AIFs), as well as MMFs and leveraged closed-ended AIFs, are within the scope of the guidelines. Fund managers will need to apply a comprehensive set of guidelines when designing the scenarios, policies and frequency of liquidity stress tests for the funds they manage. The Guidelines also recommend managers to notify National Competent Authorities (NCAs) of material risks and actions taken to address them. One Guideline also applies to depositaries, requiring verification that the fund manager has in place documented procedures for its liquidity stress testing program.

Contextually, on 5 October 2019, ESMA released an economic report – “Stress simulation for investment funds 2019” (STRESI) – documenting a comprehensive study on liquidity resilience of bond funds to liquidity shocks. The report also describes some of the methodologies and tools applied during the stress exercise which could potentially help asset managers to implement their internal LST framework.

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