Liquidity Stress Testing: the CSSF applies the ESMA Guidelines

The Luxembourg supervisory authority for the financial sector (CSSF) issued on 29 September 2020 a new circular 20/752 (the Circular) regarding the ESMA Guidelines on liquidity stress testing in UCITS and AIFs (ESMA 34-39-897, the ESMA Guidelines). This Circular and the ESMA Guidelines entered into force on 30 September 2020.

The CSSF confirms that, as national competent authority, it applies the ESMA Guidelines and has integrated them into its administrative and regulatory approach.

The ESMA guidelines are mainly applicable to authorised investment fund managers (IFMs) in respect of the UCITS and the AIFs they manage and self-managed AIFs, including exchange traded funds as well as leveraged closed-ended AIFs and money market funds (to the extent there is no conflict with the provisions of the Regulation (EU) 2017/1131 on money market funds). Certain provisions of the ESMA Guidelines also apply to depositaries and national competent authorities.

The ESMA Guidelines are supplementary to AIFMD provisions on liquidity stress testing (LST). These guidelines set out the items to be covered in an LST policy and recommendations on the frequency of the LST (quarterly, unless a higher or lower frequency is justified by the characteristics of the fund, and at least annually).

Existing IFMs in scope must:

  • adapt their LST arrangements in order to comply with the ESMA Guidelines and shall include them in their risk management procedures (RMP) in accordance with the Circular CSSF 11/512 and Circular CSSF 18/698. They are entitled to apply the proportionality principle (i.e. the ESMA Guidelines may be adapted to the nature, scale and complexity of the respective fund(s));
  • inform the CSSF immediately in case the performed LST reveals any material risks which are likely to crystallise and might threaten the ongoing liquidity of a fund, together with the actions to address these risks;
  • include the information on the LST policy in the next annual update of the RMP to be communicated to the CSSF.

New IFMs in scope must submit to the CSSF in their authorisation file an RMP, taking into the account the LST policy as referred to in the ESMA Guidelines.

Depositaries must set up appropriate verification procedures to check that IFMs have procedures in place for their LST. Depositaries are not required to assess the adequacy nor to replicate or challenge the LST undertaken by an IFM.

The CSSF may at its discretion request the submission of an IFM’s LST as well as any other information relating to the LST (including models and results).

If you have any questions, please contact your trusted Loyens & Loeff adviser.