Fund Management

The European Securities and Markets Authority (ESMA) has started today a public consultation on its draft guidance regarding liquidity stress tests of investment funds – applicable to alternative investment funds (AIFs) and Undertakings for the Collective Investment in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

Consultation on draft guidelines on liquidity stress test for investment funds

Responding to this paper

ESMA invites comments on all matters in this paper and in particular on the specific questions summarised in section 5. Comments are most helpful if they:

  • respond to the question stated;
  • indicate the specific question to which the comment relates;
  • contain a clear rationale; and
  • describe any alternatives ESMA should consider.

ESMA will consider all comments received by 1 April 2019.

The European Securities and Markets Authority (ESMA) and European securities regulators have agreed Memoranda of Understanding (MoUs) with the Financial Conduct Authority (FCA) of the United Kingdom (UK).

The MoUs form part of authorities’ preparations should the UK leave the EU without a withdrawal agreement, the no-deal Brexit scenario. The MoUs will therefore only take effect in the event of a no-deal Brexit scenario. The MoUs are similar to those already concluded on the exchange of information with many third country supervisory authorities.

The MoUs are:

1.    an MoU between ESMA and the FCA concerning the exchange of information in relation to the supervision of credit rating agencies (CRAs) and trade repositories (TRs). The MoU will allow ESMA to continue to discharge its mission and meet its mandate regarding investor protection, orderly markets and financial stability in the EU; and

2.    a multilateral MoU (MMoU) between EU/EEA securities regulators and the FCA covering supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, and will allow them to share information relating to, amongst others, market surveillance, investment services and asset management activities. This, in turn, will allow certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA.

The Board of Supervisors of the European Securities and Markets Authority (ESMA) has appointed the following individual to serve as chair of its Investment Management Standing Committee (IMSC):

·         Gabriela Figueiredo Dias, Chair of the Comissão do Mercado de Valores Mobiliários (CMVM) of Portugal.

The appointment is effective immediately and will run until 30 October 2020.

The standing committees are expert groups drawn from ESMA staff and the national competent authorities for securities markets regulation in the Member States, and are responsible for the development of policy in their respective areas.