On 2 September 2019, the European Securities and Markets Authority (ESMA) published its final guidance regarding liquidity stress testing of investment funds – applicable to Alternative Investment Funds (AIFs) and Undertakings for the Collective Investments in Transferable Securities (UCITS). The report follows an earlier consultation in February 2019 (see previous blog post here) on draft guidelines and contains an overview of the feedback received and explains how ESMA took this into account.
The guidelines are contained in Annex III of the final report and apply to fund managers, depositaries and national competent authorities (NCAs). The purpose of the guidelines is to increase the standard, consistency, and frequency of liquidity stress testing already undertaken and to promote convergent supervision of liquidity stress testing by NCAs. The guidelines should be adapted to the nature, scale and complexity of a fund.
ESMA claims that the new guidelines will strengthen liquidity tests for investment funds, as 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. Additionally, ESMA recommends that managers notify NCAs of material risks and actions taken to address them. Depositaries are now required to verify whether a fund manager has in place documented procedures for its liquidity stress testing program.
In terms of next steps, the guidelines will be translated into the official EU languages, the publication of which will trigger a two-month period where NCAs must notify ESMA whether they comply or intend to comply with the guidelines. The guidelines will apply from 30 September 2020.