AIFM Group reflects on liquidity stress testing during COVID-19.

Report this content

Unforeseen events such as the COVID-19 crisis reveal the importance of liquidity stress testing (LST). LST is a risk management tool that simulates a range of conditions including normal and stressed (i.e. extreme, unlikely, or unfavorable) in order to assess overall liquidity of a fund. As we move into 2021, fund companies must embrace a sharper focus on LST in order to ensure that their funds can react to the kind of economic strain seen during COVID-19.

In 2019, The European Securities and Markets Authority (ESMA) published new guidelines regarding LST of investment funds. The ESMA’s guidelines became effective on September 30, 2020, and are applicable to all fund managers, depositaries, and National Competent Authorities (NCAs) that have a hand in the risk management procedures of AIF and UCITS funds (including ETFs and leveraged, closed-ended AIFs). The goal is to increase the standard, consistency and, in some cases, frequency of LST already undertaken and promote convergent supervision of LST by NCAs.

There is no “one-size-fits-all” solution, but the one unanimous course of action is for all fund companies to develop a comprehensive LST program and apply it for each AIF and UCITS fund under management. The ESMA requires fund managers to design and implement a formal LST program, or documented policy that details a set of involved procedures for testing their funds. Fund companies are recommended to add a frequency of quarterly LST testing in their policies. Moreover, companies should aggregate LST across funds under management where appropriate (using the same LST on more than one fund if they are similar in strategy or exposure). 

Fund companies will be able to use LST outcomes to ensure the fund is sufficiently liquid and use the results to help in decision making. The outcome of the LST should help prepare for a crisis and broader contingency planning. The result of implementing such LST policy should help fund companies to demonstrate that a product (fund) is able to remain sufficiently liquid and fully compliant during hypothetically stressed/crisis scenarios.

If you are a fund manager interested in learning more about the new ESMA guidelines or need support in formulating an LST policy for your funds - AIFM Group can help you. For more information about AIFM Group, visit or contact Jared Fein at or +46 73-537 44 52.

AIFM Group is a European asset manager and independent fund company offering a fully compliant, comprehensive infrastructure for portfolio managers and investment professionals. AIFM also delivers premier risk management, administration, valuation, and accounting services to fund companies and financial institutions.