08 April 2019

ESMA publishes responses to its consultation on liquidity stress test guidelines for investment funds

The guidance issued on liquidity stress testing by ESMA should include, but not be limited to:

• the design of liquidity stress testing scenarios;
• the liquidity stress test policy, including internal use of liquidity stress test results;
• considerations for the asset and liability sides of investment fund balance sheets; and
• the timing and frequency for individual funds to conduct the liquidity stress tests.

Such guidance should be based on the stress testing requirements set out in Directive 2011/61/EU and how market participants carry out stress testing”.

These draft Guidelines set out the criteria for managers’ LST programmes, in doing so fulfilling the above ESRB recommendations. ESMA has produced a set of fourteen (principles-based) draft Guidelines for managers to fulfil when executing LST on their funds.

Broadly, these Guidelines set out that LST should: be tailored towards the individual fund, reflect the most applicable risks to a fund, be sufficiently extreme or unfavourable (yet plausible), sufficiently model how a manager is likely to act in times of stressed market conditions, and be embedded into the fund’s risk management framework. One Guideline applies to depositaries, outlining how they should fulfil their obligations regarding LST. The Guidelines are reinforced via a number of sections providing explanatory considerations for managers, to assist their compliance with the Guidelines.

In publishing draft Guidelines for managers, ESMA is also seeking to promote convergence in the way the NCAs supervise LST across the European Union.

Stakeholder’s views are also sought on ESMA’s overall approach, which is to develop a set of Guidelines for managers of UCITS and AIFs to follow, with explanatory considerations accompanying these. The document also contains Guidelines for depositaries.

Responses

© ESMA