The European Systemic Risk Board (ESRB) has published a recommendation on action to address systemic risks related to liquidity mismatches and the use of leverage in investment funds.

The recommendation focuses on five areas where the ESRB sees a need for the European Securities and Markets Authority to provide supervisory authorities with guidance on applying the macro-prudential elements of the current regulatory framework and/or for legislative changes to be made. The recommendation covers:

  • liquidity management tools for redemption. This recommendation is designed to address the risks that may arise when fund managers do not have adequate liquidity management tools in place such as redemption fees, redemption gates, or the ability to temporarily suspend redemptions;
  • additional provisions to reduce the likelihood of excessive liquidity mismatches. This recommendation is designed to mitigate and prevent excessive liquidity mismatches in open-ended alternative investment funds;
  • stress testing. This recommendation is designed to promote coherent liquidity stress testing practices at the investment fund level;
  • UCITS reporting. This recommendation is designed to establish a harmonised UCITS reporting framework across the EU. Although many jurisdictions within the EU have reporting obligations for UCITS, reporting practices differ widely in terms of the reporting frequency, the UCITS covered and the data reported; and
  • guidance on Article 25 of the Alternative Investment Fund Managers Directive (AIFMD). This recommendation is designed to facilitate the implementation of Article 25 AIFMD, which provides for a macro-prudential tool to limit leverage in alternative investment funds. The ESRB believes that there is a need to clarify the use of this tool by developing a common approach to ensure that Member State competent authorities are able to use the tool in a harmonised manner.

View ESRB recommendation on leverage and liquidity in investment funds, 14 February 2018