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ESMA publishes final guidelines for liquidity stress tests of investment funds

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ESMA publishes final guidelines for liquidity stress tests of investment funds

The European Securities and Markets Authority disclosed final guidelines for the liquidity stress tests of investment funds, including Alternative Investment Fund, or AIF, managers and Undertakings for the Collective Investment in Transferable Securities, or UCITS.

As of Sept. 30, 2020, the ESMA will require fund managers to stress test the assets and liabilities of their funds, including redemption requests by investors, which the regulator noted as the most common and important source of liquidity risk.

Fund managers will be obligated to apply a comprehensive set of rules when designing scenarios, policies and frequency of liquidity stress tests for the funds they manage. The new guidelines also require managers to inform national competent authorities of material risks and actions taken to tackle them. One of the regulations also applies to depositaries and requires confirmation that the fund manager has documented procedures for its liquidity stress testing program.

ESMA suggested the tests to be carried out at least annually but also outlined a preference for quarterly reviews. It also recommended that tests should be done at each stage of the fund's life cycle.