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ESMA Publishes UCITS Liquidity CSA, Highlights Areas for Improvement


The European Securities and Markets Authority (ESMA) this week published the results of its 2020 Common Supervisory Action on UCITS liquidity risk management (LRM), outlining a number of key areas that still need improving.


‘Overall, NCAs reported that most UCITS managers have demonstrated that they have implemented and applied sufficiently sound liquidity risk management processes,’ said Steven Maijoor, ESMA’s Chair. ‘However, the exercise also identified shortcomings in a few cases and the need for improvements in certain key areas.’For example, ESMA noted that there was at times no documentation available, or there was a lack of granularity or clarity in various areas, such as pre-investment liquidity analysis.Meanwhile, the design and escalation processes, as well as the verification of data reliability, also fell short in certain instances, despite regulatory obligations requiring that relevant activities should be written and documented.

As a result, National Competent Authorities (NCAs) are following up with market participants to address these issues. Individual follow-up actions will see regulatory breaches, as well as weaknesses identified, remedied. And all participants are expected to review their own LRM frameworks in an effort to ensure better governance – and that none of the shortcomings found are present in their own management processes and systems.Looking ahead, ‘further work will be carried out… to promote convergence in the way NCAs follow-up on the supervisory findings made during the CSA,’ ESMA noted.Clearly, liquidity and governance will remain a hot topic for regulators in 2021 and beyond.

Last November, for instance, the European regulator said policymakers should act to improve funds’ access to liquidity management tools (LMTs), so that they’re better prepared to withstand future shocks.That means increased focus on harmonising these tools across jurisdictions, with some national regulators, such as the Autorite des Marches Financiers (AMF), already encouraging UCITS and AIF funds to use a wide range of LMTs in times of stress.