ESMA Hikes Frequency of Liquidity Stress Tests on European funds

September 3, 2019 | Hedge Funds, Regulations

A timely directive in the wake of the Woodford debacle

The European Securities and Markets Authority (ESMA) says that European funds like UCITs, AIFs, and ETFs must conduct quarterly liquidity stress tests.

The funds must implement these tests from September 2020.

“ESMA notes that the minimum legal requirement to perform LST is annual under the AIFMD.  However, ESMA recommends a quarterly frequency for LST and recognizes that there are situations where a higher or lower frequency is necessary.”

Managers must stress test both assets and liabilities of the funds under their management.

Of critical importance is stress testing for redemption requests by investors, a significant liquidity risk, according to ESMA.

A fallout from Woodford?

The ESMA directive is timely in light of the suspension of the UK’s Woodford Equity Income Fund. As we noted this week, the fund failed to satisfy a surge in redemption demands because of its illiquid assets.

“Managers of AIFs and UCITS must be aware of the liquidity risk of the funds they manage and use stress testing as a tool to mitigate this risk,” said ESMA. “EU-based funds need to regularly test the resilience of their funds to different types of market risks, including for liquidity risk.”

European Securities and Markets Authority rejects feedback

Meanwhile, several funds offered feedback that expanded liquidity stress testing would be costly. Others raised concerns about the lack of adequate data for certain asset classes.

However, it appears that the ESMA did not consider these observations.

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Latest Alternative Investment News
Digital Assets: Grayscale Protests SEC Rejection Of Spot Bitcoin ETF, Files Suit Against Regulator
June 30, 2022     Digital Assets, Latest News, News, Regulations

Grayscale Investments, the largest digital asset manager globally, has filed a suit against the SEC for rejecting its application to convert the Grayscale Bitcoin Trust into a spot bitcoin ETF….
Venture Capital/ESG: Twelve Raises $130M For World’s First Carbon Transformation Platform

Twelve has raised a $130 million Series B round to scale up its carbon transformation technology that converts captured CO2 into products traditionally made from fossil fuels. The firm’s technology…
FinTech: Sam Bankman-Fried Of FTX Rejects Rumors He Is Acquiring Robinhood
June 30, 2022     Digital Assets, FinTech, News

FTX, the crypto platform owned by billionaire Sam Bankman-Fried, has scotched media reports that it was pursuing a deal to acquire commission-free trading app Robinhood (NASDAQ: HOOD). Bloomberg said Monday…
Alternative Investments/Digital: Amidst A Crypto Winter, 21Shares Launches The World’s Cheapest Physically Backed Bitcoin ETP

21Shares AG has launched a bitcoin ETP tailor-made for today’s crypto market, one that has been mauled by rampaging bears and gripped by a “crypto winter.” The 21Shares Bitcoin Core…