The European Securities and Markets Authority (ESMA) has released the final guidance for liquidity stress tests of investment funds.
This is applicable to both alternative investment funds (AIFs) and undertakings for the collective investment in transferable securities (UCITS).
Its new guidelines require fund managers to stress test the assets and liabilities of the funds they manage. This includes redemption requests by investors, which are the most common and important source of liquidity risk and could impact financial stability, the regulator stated.
Under the new rules, managers of AIFs and UCITS need to be aware of the liquidity risk of the funds and use stress testing to mitigate the risk. Additionally, EU-based funds need to regularly test the resilience of their funds to different types of market risks.
The aim of the new rules is to foster supervisory convergence.
Fund managers will need to apply a comprehensive set of guidelines when designing the scenarios, policies and frequency of liquidity stress tests for funds they manage. Managers are also being encouraged to inform National competent authorities (NCAs) of material risks and related actions undertaken.
Another guideline applies to depositaries, requiring verification a fund manager has documented procedures in place for liquidity stress testing.
The guidelines were created on the back of recommendations from the European Systemic Risk Board (ESRB).
These guidelines will become applicable on 30 September 2020. The guidelines are supplementary to requirements on liquidity stress testing which are enshrined in AIFMD and UCTIS directives.
Copyright © 2019 FinTech Global
Copyright © 2018 RegTech Analyst
