Liquidity risk in investment funds remains a key priority for regulatory and supervisory focus on both the EU and domestic front. Recent high-profile industry events, such as the Woodford Equity Income Fund and H2O Asset Management have further highlighted the need for a common liquidity stress testing framework across EU domiciled funds.
On 2 September, 2019, the European Securities and Markets Authority (ESMA) published its final report on guidelines on liquidity stress testing (LST) in UCITS and AIFs, which set down minimum standards for liquidity stress testing in EU domiciled funds.
The publication of the translations of the guidelines will trigger a two-month period in which National Competent Authorities (NCAs) must notify ESMA whether they comply or intend to comply with the guidelines. The CBI has noted its intent to comply with the new regulations following a letter sent to the Chair of Fund Management Companies on 7 August, 2019 reminding them of "the importance of ongoing, effective liquidity management".
Michael Hodson, Director of Asset Management and Investment Banking for the CBI, further reiterated this point in October 2019 at the PwC Director event. He highlighted that it was the responsibility of the board and the relevant Designated Persons to ensure “from a disclosure perspective, that all fund documentation should be clear, accurate and in line with relevant legislative and regulatory requirements”.
In November 2019 at the Irish Funds Symposium in London, Gerry Cross, CBI Director of Policy and Risk, identified liquidity risk as being a key focus of the CBI and other regulators going forward.
The guidelines require management companies to not prescribe a “one size fits all approach” when constructing their LST framework. The framework must take into account the nature, scale and complexity of the fund(s) under management. The policy should address the following areas:
The deadline for compliance has been set for September 2020.
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