Who is responsible for implementation of the ESMA Liquidity Stress Testing Guidelines?
The ESMA Liquidity Stress Testing Guidelines apply to managers, depositories and NCAs. Funds falling in scope of the Guidelines are UCITS, AIFs, ETFs and Money Market Funds covering both externally managed and self-managed Schemes. Closed ended non-leveraged AIFs and PIFs fall out of scope of the Guidelines.
The role of the Manager
As per the Guidelines, a Manager is defined as:
- in relation to a UCITS, the UCITS management company or, in the case of a self managed UCITS, the UCITS investment company;
- in relation to an AIF, the AIFM or an internally-managed AIF;
- in relation to an MMF, the manager of an MMF.
For externally-managed Funds, the Management Company is responsible for implementing the Liquidity Stress Testing Guidelines across funds falling in scope. Similarly, a Self-Managed Scheme having a third party appointed Investment Manager vests implementation responsibility on the appointed Investment Manager.
In the instance where a Self-Managed Scheme does not have a third party appointed investment manager, responsibility for implementation of the Guidelines lies with the Board of Directors of the Scheme.
The role of the Board of Directors
The Liquidity Stress Testing Policy shall form part of the Management Company/Scheme’s Risk Management Policy. Hence, for externally-managed Schemes, the Board of Directors of the Management Company retain responsibility for approving and overseeing such policy. The Board of Directors of the Scheme hold such responsibility in the case of self-managed Schemes. Where present, the Management Company or Investment Manager shall take responsibility in providing the Board of Directors with enough information to illustrate how compliance with the Guidelines is being ensured. Evidently, the respective Board of Directors retains governance responsibility in ensuring that procedures and methodologies used are aligned with the applicable requirements.
The role of Depositories
Under the Guidelines, Depositories are required to:
- implement procedures to verify that the Manager has in place documented procedures for its LST programme and that the manager is acting in accordance with its obligations as stipulated in the Guidelines;
- Take action on identification of a potential breach.
The Depository is however not required to assess LST adequacy or challenge the LST undertaken by the Manager.
The role of NCAs
NCAs shall ensure, through their supervision, adequate implementation of the Guidelines. In doing so, NCAs may at their discretion request from Managers LST submissions or information regarding stress testing models utilized and their results.
Managers shall take responsibility in notifying the NCA of any material risks identified via performance of LST and further inform re the actions taken to address such risks.