ESMA publishes new guidelines on Liquidity Stress Testing for Investment Funds

On 2 September 2019, ESMA published the Final Guidelines regarding liquidity stress tests of investment funds (the “Guidelines”) which will apply to both Alternative Investment Funds (AIFs) and Undertakings for the Collective Investment in Transferable Securities (UCITS). The Guidelines will become applicable on 30 September 2020 and will supplement existing requirements on liquidity stress testing in the AIFMD and UCITS Directive.
The purpose of the Guidelines is to establish consistent, effective and uniform supervisory practices across the European Union and increase the standards and frequency of Liquidity Stress Testing (“LST”). ESMA has emphasized that the LST is an important management tool for fund managers which allows firms to assess the impact of market stresses, anticipate activity in stressed market conditions and identify potential vulnerabilities. The Guidelines contain different sets of standards and require fund managers to apply a comprehensive set of rules when designing the scenarios, policies and frequency of liquidity stress tests for the funds they manage. The Guidelines also recommend that managers notify National Competent Authorities (NCAs) of material risks and actions taken to address them.

Certain parts of the Guidelines apply also to depositaries, and require depositaries to verify that fund managers have in place documented procedures for their LST programme.

For further information on the Guidelines, please see Annex III in ESMA‘s Final Report here.

Our Investment Services and Funds lawyers closely monitor developments in the regulatory framework relating to AIFs and UCITS. For more information, please contact a member of our Investment Services and Funds team.