Asset Management & Investment Funds: EU & International Developments: Aug 2019

ESMA Guidelines on liquidity stress testing in UCITS and AIFs will become applicable on 30 September 2020

ESMA issued guidelines on liquidity stress testing in UCITS and AIFs will become applicable on 30 September 2020. The guidelines require fund managers to stress test the assets and liabilities of the funds they manage. This includes redemption requests by investors which are the most common and important source of liquidity risk and could also impact financial stability. Managers of AIFs and UCITS are required to be aware of the liquidity risk of the funds they manage and use stress testing as a tool to mitigate this risk. EU-based funds need to regularly test the resilience of their funds to different types of market risks, including for liquidity risk.

Fund managers will need to apply a comprehensive set of guidelines when designing the scenarios, policies and frequency of liquidity stress tests for the funds they manage. The Guidelines also recommend managers to notify National Competent Authorities (NCAs) of material risks and actions taken to address them. One Guideline also applies to depositaries, requiring verification that the fund manager has in place documented procedures for its liquidity stress testing programme.

The common requirements will allow convergence in the way NCAs supervise liquidity stress testing across the EU.

The ESMA guidelines follow recommendations by the European Systemic Risk Board (ESRB) published in April 2018 on how to address liquidity and leverage risk in investment funds. The ESRB mandate asked for the principles to be based on the stress testing requirements set out in the AIFMD and on how market participants carry out stress testing.

The guidelines will become applicable on 30 September 2020. The requirements set out in the guidelines are supplementary to the requirements on liquidity stress testing which are enshrined in the AIFMD and UCITS directives and are already applicable.

EU equivalence policy in financial services and with non-EU countries

The European Commission published a communication on equivalence in the area of financial services together with a press release.

Equivalence is of particular interest in the context of Brexit and so it is very useful to gain insight into the process and considerations which apply.

The Commission has taken over 280 equivalence decisions relating to over 30 countries. The communication sets out how the Commission approaches equivalence and how decisions are monitored and reviewed. It also provides an overview of how recent EU legislation has strengthened the equivalence framework and concludes with details of priorities for 2019 and 2020.

Harmonisation of cross-border distribution of UCITS and AIFs.

A European Directive and Regulation on the cross-border distribution of funds (CBDF) came into force on 1 August 2019 (as noted in previous bulletins). The CBDF Directive amends relevant provisions of the UCITS Directive and AIFMD. The CBDF Directive is to be transposed by 2 August 2021 and the substantive provisions of the CBDF Regulation are to apply from that date. Please see our In Focus Paper here for further analysis.

AML/ CTF

Financial Action Task Force

G7 leaders created the Financial Action Task Force (FATF) at their Summit in 1989. They mandated this new task force, the FATF, with examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that needed to be taken to combat money laundering. This publication retraces the progress that has made during the three decades that followed, including the expansion of the FATF's mandate to include the fight against terrorist financing and the financing of weapons of mass destruction. It also sets out the work that lies ahead for the members of the FATF and the FATF Global Network.

FATF issued consolidated assessment ratings which gives an up-to-date overview of the ratings on both effectiveness and technical compliance for all countries assessed against the 2012 FATF recommendations and using the 2013 assessment methodology.

For more information in relation to this topic please contact a member of the Asset Management & Investment Funds team.

Date published: 26 September 2019