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European regulators agree common action on UCITS liquidity risk

Out-Law News | 07 Feb 2020 | 10:01 am | 1 min. read

Financial regulators across the EU have begun requesting information from funds classed as undertakings for collective investment in transferrable securities (UCITS) as part of EU-wide supervisory action on liquidity risk management.

Common supervisory action (CSA) led by EU securities market regulator the European Securities and Markets Authority (ESMA) is taking place throughout 2020. During the CSA, individual national competent authorities (NCA) will assess whether funds established in each member state comply with the UCITS rules in their day-to-day basis, using a common methodology developed together with ESMA.

The data-gathering exercise is the first phase of the CSA. The data will be used to NCAs to get an overview of the supervisory risks faced in each EU member state. In the second phase of the CSA, NCAs will carry out more in-depth supervisory analysis of a sample of UCITS managers and UCITS.

Gayle Bowen_estrategy

Gayle Bowen

Partner, Head of Office, Dublin

Managers must ensure that they are able to demonstrate to competent authorities that the funds that they manage will remain sufficiently liquid during both normal and stressed market conditions.

Irish securities regulator the Central Bank of Ireland (CBI) has contacted impacted firms about their arrangements for UCITS established in Ireland and issued a sample questionnaire for completion. It has asked firms to begin compiling the relevant data before the submission window formally opens, as at this point firms will be given approximately three weeks to complete and submit their responses.

The CBI anticipates that the submission window will open in March, at which point UCITS fund managers will be asked to submit their responses through the CBI's Online Reporting System (ONR). The CBI will not accept submissions in any other format.

Investment funds expert Gayle Bowen of Pinsent Masons, the law firm behind Out-Law, said that the exercise followed a significant focus on liquidity at national and EU level, particularly in the context of UCITS funds.

"The ESMA CSA follows the publication by ESMA of guidelines for liquidity stress testing in UCITS and AIFs, which set out the minimum standards for liquidity stress testing; and also the issuance of a 'dear CEO' letter from the CBI which was issued to all UCITS and AIF management companies," she said.

"Regardless of whether or not they have received this questionnaire, we would strongly recommend that all fund managers – in particular, UCITS management companies – fully consider its contents and the degree to which their liquidity management policies comply with the guidance. Managers must ensure that they are able to demonstrate to competent authorities that the funds that they manage will remain sufficiently liquid during both normal and stressed market conditions," she said.

UCITS managers are required to comply with a broad range of liquidity risk management rules, designed to ensure that investors are able to redeem their investments on request, including regular liquidity 'stress tests'. Last year, ESMA published new guidelines on stress testing, which will take effect on 30 September 2020.