On 2 September 2019, the European Securities and Markets Authority (ESMA) published a final report on guidelines on liquidity stress testing in UCITS and AIFs (the Guidelines).
In April 2018, the European Systemic Risk Board (ESRB) published a set of recommendations to address liquidity and leverage risk in investment funds. One of the ESRB’s recommendations asked ESMA to “develop guidance on the practice to be followed by managers for the stress testing of liquidity risk for individual AIFs and UCITS”.
On 5 February 2019, ESMA published a consultation paper on draft guidelines on liquidity stress testing in UCITS and AIFs in order to fulfil the ESRB recommendation and gather input from stakeholders. The consultation closed on 1 April 2019.
The final report provides an overview of the feedback received to the earlier consultation paper and explains how ESMA took it into account when producing the final guidelines (set out in Annex III of the final report).
In general, respondents agreed with ESMA’s chosen approach of introducing minimum standards for liquidity stress testing in AIFs and UCITS funds in Europe. Many respondents also stressed the need for a long implementation period due to the need to bring in new IT systems to cope with changed stress testing methodologies. Respondents were almost unanimously of the view that money market funds (MMFs) should be excluded from the Guidelines on the basis that MMFs already fall under the Money Market Funds Regulation (MMF Regulation) which includes more stringent provisions adjusted to their specificities in terms of liquidity.
In relation to MMFs, ESMA has decided to narrow the scope of applicable provisions applying to them, focussing on those parts of the Guidelines not already covered in the MMF Regulation. Regarding exchange traded funds (ETFs), ESMA has clarified that the Guidelines apply in addition to requirements in the ESMA ETF guidelines. Leveraged closed ended alternative investment funds have been retained in the scope of the Guidelines.
The Guidelines will be translated into the official EU languages and published on ESMA’s website. The publication of the translations will trigger a two-month period during which Member State national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The Guidelines will apply from 30 September 2020.