CROATIA: Hanfa Complies with ESMA’s Guidelines on Liquidity Stress Testing for UCITS and AIF Funds

Tuesday October 13 2020

Hanfa has adopted a decision to comply with the ESMA Guidelines on Liquidity Stress Testing for UCITS and AIFs, which became applicable on 30 September 2020.

Hanfa will include them in its supervisory practices, measures and procedures and monitor whether and how management companies and depositaries comply with them.

Management companies will be required to apply a comprehensive set of guidelines when creating and establishing models and scenarios for conducting liquidity stress testing for investment funds they manage and document them within their liquidity risk management policies. In the policies, companies will also prescribe the frequency of testing, which will depend, among other things, on the frequency of redemption of shares by investors, the share of less liquid or illiquid assets in the fund’s assets, investor concentration and the like.

Management companies are required to conduct stress testing for both the assets and liabilities of the funds it manages, and it is recommended they conduct combined testing in order to determine the overall effect on the liquidity of the funds. Testing of the fund’s liabilities primarily refers to requests for redemption of shares by investors at a time of market stress, which is the most common and most important source of liquidity risk, and can also affect the financial stability of the system. Therefore, management companies must be aware of the liquidity risk of the investment funds they manage and use testing as a tool to mitigate that risk.

In addition to the above guidelines relating to management companies , one guideline also applies to investment fund depositors, which are required  to verify and confirm through their control activities that management companies have adopted and documented procedures for conducting liquidity resilience testing, which in practice will mean that they have adopted and applied a liquidity risk management policy, in the manner defined by the Guidelines. In accordance with their powers, depositaries will be required to notify Hanfa of any discrepancies identified.

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