ICMA AMIC responds to ESMA consultation on liquidity stress testing guidelines

28 March 2019

AMIC cautions that some time is necessary for firms to comply with the requirements. It also cautions against the use of the bid-ask spread as a liquidity measure for securities and warns that a lack of data on underlying investors make redemption stress testing difficult for asset managers.

In this joint paper on liquidity stress testing, AMIC and EFAMA stressed the need to avoid overly prescriptive one-size-fits-all solutions, owing to the heterogeneity of the European funds sector.

The key recommendations from their report were:

• They do not believe changes to Level 1 legislation are necessary at this stage. Given the robust EU regulatory framework, the role of regional and national authorities should be to focus on minimising operational impediments and facilitating asset managers’ liquidity risk management tasks, by ensuring there is a broad availability of liquidity management tools at their disposal.
• A principles-based approach on LST governance and oversight is the best way forward.
• Proportionality is critical for setting the right framework for LST, allowing the heterogeneous fund sector to tailor stress tests to their respective investors and invested assets.
• While the availability of, and access to data with regard to underlying investors remains a key challenge, there is an important role for regulators providing further support to asset managers to obtain the appropriate information from a redemption risk perspective.

AMIC is pleased that the draft guidelines released by ESMA adopt a principles-based approach to liquidity stress testing and should allow for sufficiently flexible approaches across the EU investment funds sector.

Response

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