ESRB publishes recommendation on liquidity and leverage risks in investment funds

Published: 15 February 2018

The European Systemic Risk Board (ESRB) has published a Recommendation addressed to the European Securities and Markets Authority (ESMA) and the EU Commission on actions to address systemic risks related to liquidity mismatches and the use of leverage in investment funds. The Recommendation focuses on five areas where the ESRB sees a need to provide supervisory authorities with guidance on applying macroprudential elements of the current regulatory framework and/or for legislative changes to be made:

  • Liquidity management tools for redemption: A common legal framework governing the inclusion of additional liquidity management tools in the design of investment funds originating anywhere in the European Union;
  • Additional provisions to reduce the likelihood of excessive liquidity mismatches: Measures to limit the extent to which the use of liquidity transformation in open-ended AIFs could contribute to the build-up of systemic risks or the risk of disorderly markets;
  • Stress testing: ESMA to develop guidance for managers on the stress testing of liquidity risk for individual AIFs and UCITS;
  • UCITS reporting: Establishing a harmonised UCITS reporting framework across the EU to make it easier for authorities to monitor such funds and assess any risks to financial stability; and
  • Guidance on Article 25 AIFMD: ESMA to develop guidance to help supervisory authorities both assess leverage risks in the AIF sector and design, calibrate and implement macroprudential leverage limits

If you have any questions please contact Nicholas Smith