LUXEMBOURG: CSSF Confirm Compliance with ESMA’s Guidance on Liquidity Stress Testing

Tuesday September 29 2020

On 29^th September 2020, the Commission de Surveillance du Secteur Financier published a circular on its compliance with Guidelines of the European Securities and Market Authority (ESMA) on Liquidity Stress Testing in UCITS and AIFs.

The Guidelines aim in particular at increasing the standard, consistency and, in some cases, the frequency of Liquidity Stress Testing (LST) already undertaken and promote convergent supervision of LST by national competent authorities within the EU.

The present Circular applies to the following investment fund managers (“IFMs”) in respect of the undertakings for collective investment in transferable securities (“UCITS”) and the alternative investment funds (“AIFs”) they manage, including exchange traded funds (“ETFs”), whether these ETFs operate as UCITS or AIFs, as well as leveraged closed-ended AIFs:

• management companies incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010, as amended, relating to undertakings for collective investment (hereinafter “2010 Law”);
• management companies incorporated under Luxembourg law and subject to article 125-2 of Chapter 16 of the 2010 Law;
• Luxembourg branches of IFMs subject to Chapter 17 of the 2010 Law authorized under the provisions of article 125-2 of the 2010 Law;
• UCITS investment companies which have not designated a management company within the meaning of article 27 of the 2010 Law;
• alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers (hereinafter “2013 Law”); as well as
• internally managed alternative investment funds within the meaning of point (b) of article 4(1) of the 2013 Law.

The CCSF circular also contains a summary of the main elements of the Guidelines:

Guidelines applicable to IFMs:

• The design of the LST models
• Understanding liquidity risks
• Governance principles for LST
• The LST policy
• Frequency of LST
• The use of LST outcomes
• Adapting the LST to each fund
• LST scenarios
• Data availability
• Product development
• Stress testing fund assets to determine the effect on fund liquidity
• Stress testing fund liabilities to determine the effect on fund liquidity
• LST on other types of liabilities
• Funds investing in less liquid assets
• Combined asset and liability LST
• Aggregating LST across funds

The Circular with the Guidelines enter into force on 30 September 2020.

Click on the link for further information.