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08 January 2019

EFAMA and AMIC publish joint report on liquidity stress tests in investment funds


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The report highlights the role of stress tests as an important risk management tool which allows the fund manager to assess the impact of different market stresses at the portfolio level. Moreover, it outlines the long-standing standard practices in the fund industry and the existing comprehensive requirements foreseen by European and national laws.


The report also finds that existing rules governing stress testing, notably the UCITS Directive and AIFMD, are already at an advanced level, and provide robust and appropriate liquidity risk management processes.

Based on the analysis, and in view of ESMA’s ongoing work on Guidance for national regulators in respect to LST for investment funds, EFAMA and AMIC have pinpointed three key findings:

  • A principles-based approach on the Liquidity Stress Testing governance and oversight is the optimal  way forward;
  • Proportionality is key for setting the right framework for LST, allowing the heterogeneous fund sector to tailor stress tests to the profile of the fund, their respective investors and the invested assets; and
  • Given the existing robust EU regulatory framework, regional and national authorities should now focus on minimising operational impediments and facilitating asset managers’ discharge of their liquidity risk management duties, by ensuring that they can avail themselves of a broad range of liquidity management tools.

As availability of, and access to, data concerning the underlying investors remains a key challenge, regulators should assist asset managers in obtaining information from distributors that is relevant from a redemption risk management perspective.

Liquidity Stress Testing is an important risk management tool in investment funds. It has long been standard practice in the industry, and its proper supervision is key to protecting investors and ensuring the financial stability of the wider system. EFAMA and AMIC welcome the principles-based approach taken by IOSCO in its recommendations for Liquidity Risk Management for Collective Investment Schemes. Both organisations believe it strikes the right balance between providing necessary guidance and preserving fund manager flexibility to act in the best interests of all shareholders in a variety of circumstances.

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© EFAMA - European Fund and Asset Management Association


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