Liquidity management

Liquidity management: A renewed focus for European funds Liquidity management in funds, as a regulatory requirement, has long been a familiar consideration for investment managers. But now, new guidelines in this area demand additional attention. Tags: Risk mitigation, International, Regulations -- -- Published: October 21, 2020 The European Securities and Markets Authority (ESMA) recently unveiled its "Guidelines on liquidity stress testing (LST) in AIFs and UCITS1." which came into effect on 30 September, 2020. As a key component of the new guidelines, all aspects of liquidity management in an LST policy must now be documented. This documentation will form the basis for required verification by the depositary. We’ll explore what this means in greater detail below.

 The ESRB recommendations prompted ESMA to publish guidance, which it did in September 2019, for managers to follow to stress test liquidity risk for individual AIFs and UCITS. The goal was threefold: Clarify the existing requirements for managers, depositaries and national regulators under the UCITS directive3 and AIFMD4 Increase the standard, consistency and frequency (where necessary) of LST undertaken Promote convergent supervision of LST by national regulators Continuing focus by the Central Bank of Ireland The importance of liquidity management to regulators in Europe increased after a prominent flagship fund in the U.K. dissolved in June 2019. This event prompted the Central Bank of Ireland (CBI) to remind the industry in August 2019 of “the importance of ongoing, effective liquidity management and … compliance.” Then amid Covid-19 market uncertainty, CBI issued managers yet another reminder in April 2020.