ESMA issues Final Guidance on Liquidity Stress Tests for Investment Funds

The European Securities and Markets Authority (ESMA) has today published its final guidance on liquidity stress tests for investment funds applying to both Alternative Investment Funds (AIFs) and Undertakings for the Collective Investment in Transferable Securities (UCITS).  This follows a consultation process on the matter which was concluded in April 2019.

The guidelines require fund managers to stress test the assets and liabilities of managed funds.  This shall include oversight of all redemption requests by investors. Investment Fund managers must be aware of the liquidity of the funds that they manage, and this risk may be mitigated by means of regular stress testing.

In guidelines issued in April 2018 on how to address liquidity and leverage risk in investment funds, the European Systemic Risk Board called for principles based on the stress testing requirements set out in the AIFMD. As amplified further in the new ESMA Guidelines, fund managers shall be required to apply scenario-based guidelines indicating the frequency of liquidity stress tests for the funds they manage. This is also coupled with the requirement to notify National Competent Authorities (NCAs) of material risks and actions taken to address them.

The Guidelines deal with the following issues in relation to Managers:

  • The design of Liquidity Stress Testing Models
  • Understanding liquidity risks
  • Governance principles
  • Liquidity Stress Testing Policy
  • Frequency of Liquidity Stress Testing
  • Use of Liquidity Stress Testing outcomes
  • Adapting of Liquidity Stress Testing to each fund
  • Liquidity Stress Testing scenarios
  • Assessment across funds
  • Data availability
  • Product development
  • Stress testing to determine effect on liquidity assets and liabilities
  • Stress testing on other types of liabilities
  • Funds invested in less liquid assets
  • Combined asset and liability Liquidity Stress Testing

One particular provision also applies to depositaries, who shall be required to verify that the fund manager has documented procedures in place for its liquidity stress testing programmes.

The Guidelines will become applicable on 30 September 2020.

Article written by Dr Cherise Abela Grech and Dr Luke Mizzi.

For more information on Investment Fund Regulation please contact Dr Ian Gauci on, Dr Cherise Abela Grech on, and Dr Luke Mizzi on

This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.