Fund Management

Steven Maijoor, the Chair of the European Securities and Markets Authority (ESMA), delivered a speech on Brexit - the regulatory challenges at the European Financial Forum 2019 in Dublin this morning. 

The speech focused on ESMA's preparations for a no-deal Brexit across a number of areas including secondary markets, clearing and settlement and cooperation agreements while also looking to the future of the European Union's market after Brexit.

"The UK’s decision will sadly, but inevitably, move Europe’s biggest capital market outside of the Union. This is a major operation as, supported by the progress of the single market in the past decades, the EU27 and UK capital markets have become very interconnected. Carving out the UK capital market requires preparations for all circumstances, by all participants concerned, including for the real possibility that the UK leaves the Union without a deal.​"

Beyond Brexit

"Financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied and supervised."

"I would like to stress that Brexit has increased the convergence challenges of European financial supervision as the structure of the financial market is changing. Financial market activity concentrated in London is relocating to a range of hubs across the EU27 including Ireland. So, financial activity is moving from one regulator to a range of regulators, increasing the need for consistency and additional and stronger convergence tools."

"The new EU27 environment will be one where there will be a large, liquid and interconnected capital market next door, which is not part of, or subject to, its regulatory requirements. This creates the need to have tools to react rapidly to new developments."

 

The European Securities and Markets Authority (ESMA) has started today a public consultation on its draft guidance regarding liquidity stress tests of investment funds – applicable to alternative investment funds (AIFs) and Undertakings for the Collective Investment in Transferable Securities (UCITS). 

ESMA’s draft guidelines for fund managers aim to promote convergence in the way national competent authorities (NCAs) supervise funds liquidity stress testing across the European Union (EU). The consultation sets out 14 principle-based criteria for managers’ liquidity stress tests to follow when executing liquidity stress tests on their funds.

Managers of investment funds in the EU need to regularly test the resilience of their funds for different types of market risks, including for liquidity risk – the risk that assets cannot be sold quickly enough to meet investors’ redemption requests.  

Draft Guidelines on Liquidity Stress Testing

The draft principles require stress tests to:

  • 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 overall risk management framework.

One Guideline will also apply to depositaries, outlining how they should fulfil their obligations regarding liquidity stress tests. 

ESMA is seeking stakeholders’ views on the guidance fund managers should follow, which include:

  • 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.

The ESMA Guidelines follow recommendations by the European Systemic Risk Board (ESRB) published in April 2018 on how to address liquidity and leverage risk in investment funds. The ESRB mandate asked for the principles to be based on the stress testing requirements set out in the Alternative Investment Fund Directive (AIFMD) and how market participants carry out stress testing.

Next Steps

The consultation is open for feedback until 1 April 2019. ESMA will consider the feedback it receives to this consultation in early Q2 2019 and expects to publish a final report by the summer of 2019. Responses to this consultation will therefore help ESMA in finalising the guidelines for publication.