Guidelines on Liquidity Stress Testing (LST) for UCITS and AIFs

ESMA issued on the 2nd of September 2019 the final report on the Guidelines on Liquidity Stress Testing (LST) in UCITS and AIFs in order to address liquidity risks in investment funds. The Guidelines will become applicable on the 30th of September 2020 and are supplementary to the requirements on liquidity stress testing by the applicable directives.

The scope of the new guidelines is to promote financial stability by mitigating liquidity risk across Europe and encourage supervisory convergence by setting minimum standards for liquidity stress testing. The new issued LST guidelines apply to UCITS, Open-ended AIFs, Leverage closed-ended AIFs, ETFs operating as UCITS or AIFs and Money Market Funds.

The LST framework implementation will enable the fund to:

  1. ensure the fund is sufficiently liquid;
  2. strengthen the manager’s ability to manage fund liquidity in the best interests of investors
  3. identify potential weaknesses of an investment strategy and assist in investment decision-making;
  4. perform risk monitoring and decision making;

All entities that fall under the scope of the new issued guidelines are requested to document the LST framework established in an LST policy which must include at least the following:

  1. a clear definition of the role of senior management in the process;
  2. its internal ownership and which management function(s) is/are responsible for its performance;
  3. its interaction with other liquidity risk management procedures;
  4. a requirement for regular internal reporting of LST results specifying the frequency and recipients of the report;
  5. periodic review, documentation of the results and a procedure for amending the policy;
  6. the circumstances requiring escalation;
  7. the funds subject to LST;
  8. initial validation of the LST models and assumptions underpinning them;
  9. the types and severity of stress test scenarios used and the reasons for selecting those scenarios;
  10. the assumptions used relating to data availability for the scenarios, their rationale and how frequently they are revisited;
  11. the frequency at which LST is carried out and the reasons for selecting that frequency; and
  12. the methods for liquidating assets.

Out team at MAP Risk Management Services can assist you with the following:

  1. review/Update of your current LST policy in accordance with the new issued ESMA guidelines;
  2. assistance with the design of your LST model and assumptions; and
  3. drafting your LST Policy;