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Online seminar on ‘Liquidity Stress Testing for Investment Funds’

On 11 December 2019, the Florence School of Banking and Finance organised an online seminar on the topic of ‘Liquidity Stress Testing for Investment Funds’. This was the last online seminar of the FBF’s successful 2019 online seminar series.

The starting point of the discussion was the fact that, over the last decade, the asset management industry has experienced strong growth driven by rising asset valuation and steady investors’ inflows. The development of the fund industry has contributed to the diversification of the EU financial system, providing retail and institutional investors with a range of investment vehicles that can be used to gain exposures to specific asset classes and investment policies. Consequently, it is crucial to make sure that the fund industry is resilient and is able to absorb economic shocks. Stress testing is a fundamental tool for financial supervisors to identify and address structural vulnerabilities in asset management activities.

In this online seminar Christian Winkler, Head of the Markets and Investors Team in the Risk Analysis and Economics Unit at ESMA, the European Securities and Markets Authority, presented an overview of what is the the framework used by the ESMA for fund stress simulations. In his presentation, he outlined the different building blocks of a stress simulation framework, presenting a menu of options that can be selected by stress testers to perform their own assessments. Beyond the methodological aspects of the framework, the presentation focused on a case study, based on a sample of more than 6,000 UCITS bond funds, to showcase how the framework can be applied.

The online seminar draws on the findings published in September 2019 in a report by ESMA on ‘Stress simulation for investment funds’, which provides an overview of how stress simulations are carried out at ESMA, including particularly considerations on the calibration of redemption shocks for investment funds, the methods to assess the resilience of funds to shocks, and the ways to measure the impact of fund managers’ liquidation strategies on financial markets.

Download the presentation

Download the ESMA report