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ESMA Consultation on Guidance on Liquidity Stress Tests in UCITS and AIFs

On 5 February 2019, ESMA published a public consultation on its draft guidance regarding liquidity stress tests (“LSTs”) of investment funds including alternative investment funds (“AIFs”) and UCITS. 

The stated aim of the paper is to promote convergence in how national competent authorities (“NCAs”) supervise funds liquidity stress testing across the EU.  The consultation sets out 14 principle-based criteria for managers’ to apply when executing LSTs on their funds which requires that the LST:

  • be tailored towards the individual fund;
  • reflect the most applicable risks to a fund;
  • be 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The consultation on the draft guidance was open for feedback until 1 April 2019.  ESMA will consider the feedback it receives to this consultation in early Q2 2019 and expects to publish a final report by the summer of 2019.