New ESMA Guidelines announced


Liquidity Risk Management: new regulatory requirements for investment funds – ESMA LST Guidelines & CSSF Circular 19/733

16 January 2020

The steady growth of collective investment undertakings in recent years, the abundance of different investment strategies, and the diversity of investor base has greatly amplified the risk of liquidity mismatches in investment funds. Recent events have highlighted the importance of appropriate liquidity risk monitoring, the implementation of an adequate stress testing framework, and liquidity contingency planning, as well as the need for a robust overarching risk governance.

Following recommendations from the European Systemic Risk Board in early 2018, and after an extended consultation phase, ESMA published its Final Report, “Guidelines on liquidity stress testing in UCITS and AIFs” (Guidelines) in September 2019.

Furthermore in December 2019, the CSSF implemented the 2018 IOSCO’s recommendations in its Circular 19/733, “IOSCO recommendations: Liquidity risk management for open-ended undertakings for collective investment”.

What are the challenges brought by the new ESMA Guidelines?

The Guidelines focus on micro prudential liquidity stress testing (LST) and its objectives are twofold: (i) fostering financial stability by mitigating liquidity risk and (ii) promoting supervisory convergence across EU-domiciled funds and fund managers by setting minimum standards for LST.

The Guidelines require asset managers to have a strong understanding of each managed fund’s liquidity risk arising from the asset and liability side and its overall liquidity risk. Furthermore, the Guidelines set down a principle-based approach to LST requiring asset managers to implement the Guidelines taking into account the nature, scale and complexity of the fund(s) under management. The main challenges evolve around:

  • The design of a framework promoting the knowledge of liquidity risk and enforcing the use of liquidity assessment for management and investment decisions through the life of the products
  • The development of a liquidity measurement solution compliant with the technical requirements (including assets as well as liabilities requirements)
  • The coverage of the liquidity of a wide variety of asset classes
  • The sourcing of liquidity related data while ensuring independence with respect to portfolio and investment managers
  • The adoption of a strong model risk governance through the independent review of the LST model
  • The documentation and formalization of the liquidity risk management framework, tools and methodologies.

More information can be found on our dedicated LST webpage.

What are the challenges brought by the new Circular 19/733?

The CSSF Circular 19/733 implementing IOSCO recommendations, addresses the structural vulnerabilities associated with asset management activities in the area of liquidity risk, that were identified by the Financial Stability Board (FSB) as potential risks to financial stability. They point to the importance of an effective liquidity risk management to safeguard the interests and protection of investors, to maintain the orderliness and robustness of funds and markets, and to help reduce systemic risk, all of which support financial stability.

The IOSCO recommendations address in particular: (i) the design process of funds, (ii) the day-to-day liquidity management of funds, and (iii) contingency planning. The main challenges evolve around:

  • The focus on liquidity considerations while designing a product by accounting for its characteristics (distribution channel, dealing frequency, liquidity tools, asset focus, target investor)
  • The design and documentation of a liquidity process encompassing profiling, limit setting, monitoring and escalation while ensuring a robust governance through independence
  • The access to relevant and up-to-date information
  • The dissemination of liquidity risk related information to management, investors and prospective investors
  • The capability to identify and monitor early warning signals of evaporating liquidity and fastened redemptions
  • The adoption of liquidity assessment methodologies and techniques capturing all relevant factors and allowing for stress-testing
  • The design, implementation and testing of a contingency plan relying on liquidity risk management tools.

When do these new regulatory requirements apply
  • The ESMA Guidelines take effect from 30 September 2020.
  • The CSSF 19/733 Circular enters into force with immediate effect.

How can Deloitte help?

Deloitte’s risk management specialists leverage on market intelligence and industrial expertise when assisting you in:

  • Performing a gap analysis of your liquidity risk management framework in light of new regulatory requirements
  • Designing and implementing your liquidity risk management framework, including a strong focus on stress testing
  • Reviewing and validating your liquidity stress testing methodology 
  • Providing trainings either tailor-made or via our Quant Master Class series
  • Offering regular liquidity risk and stress testing reporting including liability side


Xavier Zaegel
Partner – Capital Markets/Financial
Risk Leader
Tel : +352 45145 2748

Sylvain Crépin
Partner – Capital Markets/Financial
Tel : +352 45145 4054

Gildas Blanchard
Senior Manager – Capital Markets/Financial
Tel : +352 45145 2962

Yan Li
Manager – Capital Markets/Financial
Tel : +352 45145 4794

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