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Alternative Investment Fund Managers Directive (AIFMD II)
Liquidity Stress Testing Rules Implementation in EU
The revised Alternative Investment Fund Managers Directive (AIFMD II), effective in 2024, focuses on improving liquidity risk management for alternative investment funds (AIFs) in the EU. It requires open-ended funds to implement at least two liquidity management tools (LMTs), such as redemption gates, swing pricing, or notice periods.
These tools help manage redemption pressures during market stress and protect both the fund’s stability and its investors. By standardizing the use of LMTs across member states, AIFMD II ensures consistency and reduces the risks of differing national practices.
AIFMD II also introduces strict requirements for stress testing to strengthen liquidity risk management. Fund managers must regularly test their funds under different scenarios, including extreme market conditions, to identify weaknesses and prepare for potential risks.
These stress tests provide critical insights into a fund’s ability to handle liquidity challenges. The European Securities and Markets Authority (ESMA) will issue guidelines to ensure these tests are effective and consistent. With a combination of liquidity tools and stress testing, AIFMD II aims to enhance financial stability and safeguard investors.
Reference: ESMA Guidelines on liquidity stress testing in UCITS and AIFs
Improved Liquidity Risk Management
for US Investment Funds in 2024
In 2024, the U.S. Securities and Exchange Commission (SEC) will enhance liquidity risk management for open-ended investment funds through updated regulations. Under these rules, funds must implement at least two Liquidity Management Tools (LMTs), such as redemption gates or swing pricing, to address redemption pressures during market stress and ensure stability.
Mandatory stress testing will also be introduced, requiring funds to evaluate liquidity resilience under various scenarios, including extreme market conditions. The SEC will provide guidelines to standardize these practices, fostering consistency across the industry.
These measures aim to protect investors and strengthen financial stability, aligning the U.S. with global best practices.
Reference: SEC Proposed Rule 22e-4 on Liquidity Risk Management
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