Liquidity Stress Testing AIFs and UCITS


Liquidity Stress Testing for alternative investment funds (“AIFs”) and Undertakings for the Collective Investment in Transferable Securities (“UCITS”)

The European Securities and Markets Authority (“ESMA”) Final Report to be issued in summer 2019

Back in April 2018, the European Systemic Risk Board (“ESRB”) published a set of recommendations to address liquidity and leverage risk in investment funds. Liquidity risk is the risk that assets cannot be sold quickly enough to meet investors’ redemption requests.

The European Systemic Risk Board (“ESRB”) requested ESMA, to “develop guidance on the practice to the followed by managers for the stress testing of liquidity risks for individual AIFs and UCITS”.

ESMA’s produced these draft guidelines for fund managers with the aim of promoting convergence in the way national competent authorities supervise funds liquidity stress testing across the European Union.

ESMA’s public consultation on draft guidelines issued earlier this year in February 2019 and sets out 14 principle-based criteria for liquidity stress tests to follow when executing liquidity stress tests.

Draft Guidelines on Liquidity Stress Testing

The draft principles require stress tests to:

  • be tailored for the individual fund;
  • reflect the relevant risks to a fund;
  • realistically extreme or unfavourable ;
  • reflect how a manager is most likely to act in times of stressed market conditions; and
  • stress tests be embedded into the fund’s overall risk management framework.

ESMA is seeking stakeholders’ views

ESMA is seeking stakeholders’ views on the guidance fund managers should follow to:

  • 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.

Next steps and how Deloitte can help

ESMA will consider the feedback it receives from stakeholders and it is expected that their final report to be published by the summer of 2019.

Deloitte can help you:

  • Meet regulatory compliance requirements 
  • Design liquidity stress tests 
  • Review and validate your methodology and stress test scenarios 
  • Develop transparent and reviewable stress testing program
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