A principles-based approach to the liquidity stress testing (LST) governance and oversight is the optimal way forward, according to a joint report published by The European Fund and Asset Management Association (EFAMA) and the International Capital Market Association’s (ICMA) Asset Management and Investors Council (AMIC).
The report on LST in investment funds highlighted the role of stress tests as an important risk management tool, which allows the fund manager to assess the impact of different market stresses at the portfolio level.
In the report, EFAMA and AMIC explored the long-standing standard practices in the fund industry and the existing comprehensive requirements foreseen by European and national laws.
The report also finds that existing rules governing stress testing, notably the UCITS Directive and Alternative Investment Fund Managers Directive, are already at an “advanced level, and provide robust and appropriate liquidity risk management processes”.
Based on the analysis, and in view of European Securities and Markets Authority’s ongoing work on guidance for national regulators in respect to LST for investment funds, EFAMA and AMIC also said proportionality is key for setting the right framework for LST.
The report explained: “Allowing the heterogeneous fund sector to tailor stress tests to the profile of the fund, their respective investors and the invested assets; and given the existing robust EU regulatory framework, regional and national authorities should now focus on minimising operational impediments and facilitating asset managers’ discharge of their liquidity risk management duties.”
Both organisations said this can be carried out “by ensuring that [authorities] can avail themselves of a broad range of liquidity management tools”.
It added: “As availability of, and access to, data concerning the underlying investors remains a key challenge, regulators should assist asset managers in obtaining information from distributors that are relevant from a redemption risk management perspective.”
Tanguy van de Werve, director general at EFAMA, commented: “European fund managers can today rely on very robust and comprehensive regulatory frameworks for liquidity risk management.”
He added: “The effectiveness of our risk management systems has been successfully tested over the last years, most notably during the euro crisis and the Brexit referendum. However, some improvements still need to be made to provide all managers with the appropriate liquidity management toolkit and facilitate their access to key data.”
“Together with AMIC, EFAMA will continue to monitor and work closely with all relevant global, regional and national authorities to ensure policy development in this area remains realistic, proportionate and meaningful.”
Martin Scheck, chief executive at ICMA, said: “This study is the latest in a series of joint reports with EFAMA on systemic risk in asset management, following papers on liquidity risk management in 2016 and leverage in 2017.”
He added: “It is designed to highlight the robustness of liquidity stress testing programmes in Europe and the need for a flexible, principles-based regulatory approach in this area.”
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