The European Securities and Markets Authority (ESMA) is to implement liquidity stress testing on UCITS and alternative investment funds (AIF), which it announced in its recent guideline report. The report follows feedback ESMA received on its draft posted in February.

The liquidity stress tests are to be carried out on a quarterly basis.

The European financial regulator received 30 responses which, for the most part, agreed with implementing a minimum standard of liquidity stress testing but will need to have a long enough transitioning period for companies to introduce new IT systems. Therefore, the guidelines are expected to be applied by 30 September 2020.

ESMA has had significant impact on the ETF industry in the last 18 months having also implemented the Benchmark Regulation (BMR) which has forced index providers to register with the authority to be able to act as the underlying benchmarks for ETFs.

STOXX registers as benchmark administrator

ETFs were supported to be included in the guidelines having fallen under UCITS funds however, one asset manager which remained anonymous supported the exclusion of ETFs from the scope because of the significant differences between ETFs and mutual funds.

ESMA said in the report: “Many respondents underlined that ETF structures’ specificities should be fully acknowledged, e.g. the role of authorised participants and other liquidity providers.

“Some of the respondents pointed out that the guidelines should recognise the role of the secondary market for ETFs.”