Liquidity risk in funds has and continues to be a subject of focus for both national and international regulators/ authorities. In April 2018, the European Systemic Risk Board ("ESRB") published recommendations on how to address liquidity and leverage risk in investment funds. Included in these recommendations was a request that ESMA develop guidance for fund managers of both UCITS and AIFs with regard to liquidity stress testing ("LST") based on the stress testing requirements set out in AIFMD and how market participants carry out stress testing. Accordingly, ESMA has developed and launched (on 5 February) a public consultation on 14 draft guidelines ("Guidelines"). The Guidelines require that LST should:

  • be tailored to the individual fund;
  • reflect the most applicable risks to a fund;
  • include stressed scenarios that are 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.

The Guidelines also provide that depositaries and how they should fulfil their obligations regarding liquidity stress tests. This guideline provides that depositaries should verify that a fund has documented procedures for its LST programme, which could include reviewing the UCITS RMP and/or AIF RMP to confirm that the manager carries out LST on the fund.

ESMA is requesting feedback on:

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

The consultation will close on 1 April 2019.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.