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UCITS liquidity risk management: ESMA 2020 common supervisory action results
The European Securities and Markets Authority (ESMA) has published the results of the 2020 common supervisory action (CSA) on UCITS liquidity risk management (LRM). The purpose of the CSA was simultaneously to conduct coordinated supervisory activities in 2020 and to assess whether UCITS managers comply with their liquidity management obligations. The CSA was also an opportunity to strengthen the ongoing exchange of supervisory knowledge and experience among national competent authorities (NCAs).
Overall, cases where NCAs identified significant liquidity risks that could jeopardise the capacity of the UCITS under review to meet redemption requests, or to honour their other liabilities, were low. However, for a very limited number of UCITS, liquidity profiles indicated potential asset to liability mismatch risks, which were only sometimes mitigated using liquidity management tools. In most cases, the level of compliance with the applicable rules on LRM was satisfactory. However, there were shortcomings in some cases and a need for improvement in certain key areas.
NCAs will undertake follow-up actions on individual cases to ensure that regulatory breaches and weaknesses identified are remedied. Further work will be carried out at the level of ESMA to promote convergence in the way NCAs follow-up on the supervisory findings made during the CSA.
ESMA advises that the CSA results should be read in conjunction with its report responding to the European Systemic Risk Board's recommendation on liquidity risks in investment funds, in which it defined five priority areas for consideration.
EU MMF Regulation: ESMA consultation
ESMA is consulting on potential reforms of the EU Money Market Funds Regulation (MMF Regulation). ESMA sets out four types of potential reforms for MMFs:
- reforms targeting the liability side of MMFs – such as decoupling regulatory thresholds from suspensions/gates to limit liquidity stress, and to require MMF managers to use liquidity management tools such as swing pricing;
- reforms targeting the asset side of MMFs by, for example, reviewing requirements around liquidity buffers and their use;
- reforms targeting both the liability and asset side of MMFs by reviewing the status of certain types of MMFs such as stable Net Asset Value (NAV) MMFs and Low Volatility Net Asset Value (LVNAV); and
- reforms that are external to MMFs themselves by assessing whether the role of sponsor support should be modified. In addition, ESMA is also gathering feedback from stakeholders on other potential changes, particularly linked to ratings, disclosure and stress testing.
ESMA will consider the feedback it receives to this consultation in Q2 2021 and expects to publish its opinion on the review of the MMF Regulation in the second half of 2021. Article 46 of the MMF Regulation requires the European Commission to review, following consultations with ESMA, the adequacy of the MMF Regulation from a prudential and economic point of view by 21 July 2022.
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Authored by Yvonne Clapham
