ESRB on ESMA Liquidity Tools Proposals


On Sep. 2, ESRB responded to ESMA consultation on RTS, guidelines.


  • ESRB published its response to the ESMA consultation on draft regulatory technical standards (RTS) and guidelines on liquidity management tools, issued in Jul. 2024.
  • Builds on ESRB issues note of Sep. 2023 on high-level approach to addressing risks.
  • Follows ESMA Jul. 2024 consulted on fund liquidity management tools, see #218755.
  • Also follows ESRB Sep. 2023 note of policy options for certain funds, see #183798.
  • ESRB Response
  • Summarizes first stage of ESRB work to adapt certain policy tools to reflect revised AIFMD, UCITS Directive and on assessing need for new tools to reduce systemic risk.
  • Considers 3 policy tools that can be adapted to better serve financial stability issues.
  • First, sets out how structural liquidity mismatch in real estate funds could be reduced by ensuring closer alignment between the fund's redemption terms and its investment strategy by introducing longer notice periods and a lower redemption frequency.
  • Second, discusses how financial stability could benefit if investment funds used anti-dilution liquidity management tools (LMTs) to mitigate first-mover advantage.
  • Third, describes how liquidity stress testing framework for investment funds could incorporate liquidity risk stemming from margin and/or collateral more effectively.
  • ESRB considers that extension of notice periods requires an appropriate baseline, proposes minimum baseline notice period of 12 months, where no mitigating factors.
  • ESMA guidance around anti-dilution LMTs should consider collective actions by fund managers and changing market circumstances, and clearly define exceptions.
  • ESRB calls for clearer inclusion of margin preparedness in ESMA Guidelines on liquidity stress testing for fund managers, and to further strengthen fund risk management framework to consider risks arising from margin and collateral calls more thoroughly.

Regulators EU ESRB
Entity Types Depo; HF; IA; Inv Co
Reference Lt, 9/2/2024; ESMA34-1985693317-1095, ESMA34-1985693317-1097; AIFMD Dir 2011/61, Dir 2024/927; UCITS Dir 2014/91, Dir 2009/65; ESG
Functions Compliance; Financial; Legal; Market Conduct; Operations; Outsourcing; Product Administration; Product Design; Reporting; Risk; Treasury
Countries European Union
Category Central Government
State
Products Fund Mgt; Hedge Funds; Loan; Mutual Funds; Securities
Regions EMEA
Rule Type Guidance
Rule Date 9/2/2024
Effective Date 9/2/2024
Rule Id 224431
Linked to Rule :218755
Reg. Last Update 9/2/2024
Report Section EU

Last substantive update on 09/04/2024