ESMA Consults On Liquidity Stress Testing For UCITS And AIFs

Author:Arthur Cox
Profession:Arthur Cox

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...

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