Thursday July 16 2020
News Source: Fund Regulation
On 13th July 2020, the Central Bank of Ireland (CBI) issued the 29th edition of the Central Bank UCITS Q&A, which includes new Q&A IDs 1095, 1096 and 1097 in relation to liquidity stress testing in UCITS.
The Q&As clarify the Central Bank’s expectations in relation to liquidity stress testing (LST) in UCITS, particularly in relation to the application of the ESMA ‘Guidelines on liquidity stress testing in UCITS and AIFs’. The Q&As set out that the LST policy may be documented within the UCITS Risk Management Policy, that LST should generally be carried out at least quarterly and that LST should be employed at all stages in a UCITS lifecycle, including at the design phase.
Q: In relation to the ESMA Guidelines on liquidity stress testing in UCITS and AIFs, section 1.4 (the LST Policy), where should the liquidity stress testing policy be documented?
A: The ESMA Guidelines state that the liquidity stress testing policy should be documented within the UCITS Risk Management Process. However, it is the UCITS management company which is required to have a risk management policy which enables the management company to assess, for each UCITS it manages, the exposure of the UCITS to market, liquidity and counterparty risks, and the exposure of the UCITS to all other risks, including operational risks, which may be material for each UCITS. UCITS management companies are required to conduct, where appropriate, periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact each UCITS it manages. As such, it may be appropriate for the liquidity stress testing policy to be documented within the risk management policy of the UCITS management company. Notwithstanding this, as outlined in the ESMA Guidelines, the liquidity stress testing should be adapted appropriately to each fund under management.
Q: How often should Liquidity Stress Testing be carried out?
A: The Central Bank considers that liquidity stress testing should generally be performed at least quarterly. The determination of a higher or lower frequency should be based on the fund’s characteristics and the reasons for such a determination should be recorded in the liquidity stress testing policy.
Q: Should a UCITS Management Company conduct liquidity stress testing at the design phase of the fund’s lifecycle?
A: Yes. ESMA’s Guidelines on liquidity stress testing in UCITS and AIFs set out that liquidity stress testing should, where appropriate, be employed at all stages in a fund’s lifecycle. The use of liquidity stress testing at the design phase of a UCITS’ lifecycle should be carried out to adequately understand the potential risks that may impact the UCITS, in various market conditions, throughout its lifecycle.
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