AIFMD FAQ

How should AIFMs report the results of stress tests?

This only concerns Authorised (non-Light) funds.

AIF Question 279: Provide the results of the stress tests performed in accordance with point (b) of Article 15(3) of Directive 2011/61/EU.

The indicated point (b) states: “ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures.”

The full text of Article 15 can be found below.

AIF Question 280: Provide the results of the stress tests performed in accordance with the second subparagraph of Article 16(1) of Directive 2011/61/EU.

The indicated second subparagraph states: “AIFMs shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly.”

The full text of Article 16 can be found below.

Question 83 below explains the exemption for closed-ended unleveraged AIFs.

Relevant questions from the ESMA AIFMD Q&A:

Question 55 [last update 26 March 2015]:

Should non-EU AIFMs marketing their AIFs in the Union under Article 42 of the AIFMD report the results of stress tests under Articles 15 and 16 of the AIFMD (questions 279 and 280 of the consolidated reporting template)?

Answer 55:

Non-EU AIFMs marketing their AIFs in the Union under Article 42 of the AIFMD should report the results of stress tests insofar as this is required by the national private placement regime of the Member States where they market their AIFs or if the non-EU AIFMs have carried out such stress tests.

Question 83 [last update 4 December 2019]:

How should AIFMs report results of liquidity stress tests for closed-ended unleveraged AIFs that they manage?

Answer 83 [last update 4 December 2019]:

Article 16(1) exempts closed-ended unleveraged AIFs from implementing liquidity risk management systems and from “conducting stress tests, under normal and exceptional liquidity conditions, which enable AIFMs to assess the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly” (liquidity stress tests).

However, AIFMs need to report results of liquidity stress tests for all their AIFs as part of their reporting to competent authorities as particularly required in accordance with Article 24(2) of the AIFMD, further specified by Article 110(2)(f) of Commission Delegated Regulation (EU) No 231/2013, and integrated in field 280 of the AIFMD reporting template
( 2013‑1359_consolidated_aifmd_reporting_template ).

For closed-ended unleveraged AIFs, given the mandatory character of the field, AIFMs should indicate the question is Not Applicable and at least report in this field the fact that the relevant fund is a closed-ended unleveraged AIF.

However, where an AIFM decides to conduct liquidity stress tests for unleveraged closed-ended AIFs, it should report the results of the liquidity stress tests in the same field.

The full text of the articles from Directive 2011/61/EU:

Article 15 - Risk management:

1. AIFMs shall functionally and hierarchically separate the functions of risk management from the operating units, including from the functions of portfolio management.

The functional and hierarchical separation of the functions of risk management in accordance with the first subparagraph shall be reviewed by the competent authorities of the home Member State of the AIFM in accordance with the principle of proportionality, on the understanding that the AIFM shall, in any event, be able to demonstrate that specific safeguards against conflicts of interest allow for the independent performance of risk management activities and that the risk management process satisfies the requirements of this Article and is consistently effective.

2. AIFMs shall implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed.

AIFMs shall review the risk management systems with appropriate frequency at least once a year and adapt them whenever necessary.

3. AIFMs shall at least:

(a)

implement an appropriate, documented and regularly updated due diligence process when investing on behalf of the AIF, according to the investment strategy, the objectives and risk profile of the AIF;

(b)

ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures;

(c)

ensure that the risk profile of the AIF shall correspond to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the AIF rules or instruments of incorporation, prospectus and offering documents.

4. AIFMs shall set a maximum level of leverage which they may employ on behalf of each AIF they manage as well as the extent of the right to reuse collateral or guarantee that could be granted under the leveraging arrangement, taking into account, inter alia:

(a)

the type of the AIF;

(b)

the investment strategy of the AIF;

(c)

the sources of leverage of the AIF;

(d)

any other interlinkage or relevant relationships with other financial services institutions, which could pose systemic risk;

(e)

the need to limit the exposure to any single counterparty;

(r)

the extent to which the leverage is collateralised;

(g)

the asset-liability ratio;

(h)

the scale, nature and extent of the activity of the AIFM on the markets concerned.

5. The Commission shall adopt, by means of delegated acts in accordance with Article 56 and subject to the conditions of Articles 57 and 58, measures specifying:

(a)

the risk management systems to be employed by AIFMs in relation to the risks which they incur on behalf of the AIFs that they manage;

(b)

the appropriate frequency of review of the risk management system;

(c)

how the risk management function is to be functionally and hierarchically separated from the operating units, including the portfolio management function;

(d)

specific safeguards against conflicts of interest referred to in the second subparagraph of paragraph 1;

(e)

the requirements referred to in paragraph 3.

Article 16 - Liquidity management:

1. AIFMs shall, for each AIF that they manage which is not an unleveraged closed-ended AIF, employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations.

AIFMs shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly.

2. AIFMs shall ensure that, for each AIF that they manage, the investment strategy, the liquidity profile and the redemption policy are consistent.

3. The Commission shall adopt, by means of delegated acts in accordance with Article 56 and subject to the conditions of Articles 57 and 58, measures specifying:

(a)

the liquidity management systems and procedures; and

(b)

the alignment of the investment strategy, liquidity profile and redemption policy set out in paragraph 2.

The ESMA published Guidelines on liquidity stress testing in UCITS and AIFs.

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