On 2nd September 2019 ESMA issued its final report on the Guidelines on Liquidity Stress Testing (LST) in UCITS and AIFs. The report and its requirements came into effect on 30th September 2020.
The new guidelines aim to promote financial stability by mitigating liquidity risk across Europe and ensuring supervisory convergence through minimum standards for liquidity stress testing. The Guidelines apply to UCITS, open-ended AIFs, leveraged closed-ended AIFs, ETFs operating as UCITS or AIFs and Money Market Funds.
All entities that fall within scope of the Guidelines are required to document their framework through an LST policy which must include; the role of the senior management, the function in charge of performing and reporting on the LST, along with appropriate results and recommendations. Moreover, the LST policy should outline the reviews of the procedures, the frequency of the LST, and the methods used for liquidating assets.