ESMA finalises liquidity stress test guidelines for UCITS and AIFs
02 September 2019 Paris
Image: Shutterstock
The final version of industry guidelines on new liquidity stress tests for UCITS and alternative investment fund (AIF) managers has been published by the European Securities and Markets Authority (ESMA).
As of 30 September 2020, ESMA will require fund managers to stress test the assets and liabilities of their funds. This includes redemption requests by investors, which ESMA sees as the most common and important source of liquidity risk.
Under the new guidelines, which apply to managers, depositaries and national competent authorities (NCAs), fund managers will need to adhere to a comprehensive set of guidelines when designing the scenarios, policies and frequency of liquidity stress tests for the funds they manage.
The results of these tests will then enable managers to notify NCAs of “material risks and actions taken to address them”.
ESMA has decreed that, as a minimum, the stress tests should be carried out at least annually, but has outlined a preference for quarterly tests. It also confirms that, where appropriate, tests should be done at each stage of the fund’s lifecycle.
One guideline also applies to depositaries and requires verification that the fund manager has documented procedures for its liquidity stress testing programme.
The common requirements will allow convergence in the way NCAs supervise liquidity stress testing across the EU.
ESMA confirmed that the guidelines are supplementary to the requirements on liquidity stress testing that come as part of the Alternative Investment Fund Managers Directive and UCITS directive, which are already live.
Along with the final guidelines, today’s report on the tests includes an overview of the industry feedback to ESMA’s February consultation paper and explains how it took this into account when drafting the final guidelines.
ESMA received 30 responses, mainly from asset management industry associations and financial firms.
In its feedback on the responses, the authority said that, in general, respondents agreed with its approach of introducing minimum standards for liquidity stress testing in AIFs and UCITS funds in Europe.
A significant majority of respondents stressed the need for a long implementation period of 18 to 24 months due to the need to bring in new IT systems to cope with changed stress testing methodologies. In its feedback to this request, ESMA said the September deadline “grants a sufficient implementation period, bearing in mind the importance of ensuring convergence on how liquidity stress tests are performed by the asset management industry”.
Elsewhere, some respondents pointed out that the MMF stress test reporting has been a burdensome exercise and suggested ESMA refrain from such a detailed approach for stress test reporting.
Commenting on the final guidelines, Joseph Cordahi, product strategy director at NeoXam, a global software provider, said: “These guidelines from ESMA reinforce the importance of fund managers making sure they have the best tools in place to accurately calculate liquidity risk."
"Detailed insight into the precise positions taken by the fund, as well as information on the type of exposure, will be key to ensuring fund managers are in line with the guidelines.”
As of 30 September 2020, ESMA will require fund managers to stress test the assets and liabilities of their funds. This includes redemption requests by investors, which ESMA sees as the most common and important source of liquidity risk.
Under the new guidelines, which apply to managers, depositaries and national competent authorities (NCAs), fund managers will need to adhere to a comprehensive set of guidelines when designing the scenarios, policies and frequency of liquidity stress tests for the funds they manage.
The results of these tests will then enable managers to notify NCAs of “material risks and actions taken to address them”.
ESMA has decreed that, as a minimum, the stress tests should be carried out at least annually, but has outlined a preference for quarterly tests. It also confirms that, where appropriate, tests should be done at each stage of the fund’s lifecycle.
One guideline also applies to depositaries and requires verification that the fund manager has documented procedures for its liquidity stress testing programme.
The common requirements will allow convergence in the way NCAs supervise liquidity stress testing across the EU.
ESMA confirmed that the guidelines are supplementary to the requirements on liquidity stress testing that come as part of the Alternative Investment Fund Managers Directive and UCITS directive, which are already live.
Along with the final guidelines, today’s report on the tests includes an overview of the industry feedback to ESMA’s February consultation paper and explains how it took this into account when drafting the final guidelines.
ESMA received 30 responses, mainly from asset management industry associations and financial firms.
In its feedback on the responses, the authority said that, in general, respondents agreed with its approach of introducing minimum standards for liquidity stress testing in AIFs and UCITS funds in Europe.
A significant majority of respondents stressed the need for a long implementation period of 18 to 24 months due to the need to bring in new IT systems to cope with changed stress testing methodologies. In its feedback to this request, ESMA said the September deadline “grants a sufficient implementation period, bearing in mind the importance of ensuring convergence on how liquidity stress tests are performed by the asset management industry”.
Elsewhere, some respondents pointed out that the MMF stress test reporting has been a burdensome exercise and suggested ESMA refrain from such a detailed approach for stress test reporting.
Commenting on the final guidelines, Joseph Cordahi, product strategy director at NeoXam, a global software provider, said: “These guidelines from ESMA reinforce the importance of fund managers making sure they have the best tools in place to accurately calculate liquidity risk."
"Detailed insight into the precise positions taken by the fund, as well as information on the type of exposure, will be key to ensuring fund managers are in line with the guidelines.”
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