Most recently, the onset of the pandemic in March 2020 led to financial market stress, which also revealed liquidity risks in certain segments of fund industry, as the demand for investor redemptions outpaced the ability of certain funds to meet those requests.
On Tuesday, in the wake of that consultation, ESMA published its final standards in this area.
“These provisions will make [European] fund managers better equipped to manage the liquidity of funds, in particular in case of market stress,” the regulator said in a release.
Improved liquidity management in the fund sector will also mitigate financial stability risks, ESMA noted.
In the final version of these standards, ESMA made several revisions, including dropping proposed new guidance on the governance and disclosure of liquidity tools. It also introduced some added flexibility in the way certain tools work “to account for different market practices”; and it deleted provisions that could restrict the ability of fund managers to select and calibrate certain tools.
“ESMA has decided to refrain from taking a restrictive approach in the final guidance and to better recognize the manager’s sole responsibility on the selection, activation and calibration of [liquidity tools] in light of the specific situation and the market conditions,” it said.
At the same time, it stressed that regulators should ensure that fund managers do not use liquidity tools, “as a backstop for the purpose of addressing liquidity issues stemming from inadequate fund structuring, poor investment decisions, inappropriate risk management or other management failings, and even more so for funds marketed to retail investors which need a higher level of protection.”
The final standards and guidance have now been submitted to the European Commission for adoption.
The EC has three months to make a decision on the regulator’s proposals and funds would have 12 months after that to comply with the new standards.