GERMANY: BaFin Publishes Report with Guidelines for Asset Management Companies

Monday December 11 2017

On 8^th December 2017, the Federal Financial Supervisory Authority (BaFin) published a report with guidelines for liquidity stress tests for asset management companies. This had been the subject of a public consultation prior to publication. The guidelines describe what BaFin considers to be an appropriate design for liquidity stress tests in the context of liquidity risk management.

The liquidity risk facing investment funds is difficult to determine as these funds hold assets with different liquidity levels while at the same time offering investors short-term redemption. Stress tests are an important tool for measuring and controlling this risk. They can help to improve portfolio and risk management, reduce liquidity risk at the level of the individual investment fund and, consequently, also limit risk within the financial system. Whether the design of a stress test is appropriate depends on the business model and the size of the investment company. However, reporting channels and responsibilities should always be clearly defined. As far as possible, the design of stress test scenarios as well as their frequency should be tailored to the individual investment funds. The guidelines therefore do not contain generally applicable provisions for liquidity stress tests, but rather assign responsibility for finding the most suitable risk management tools to the asset management companies.

The design of liquidity stresses should account appropriately for the business model and size of the asset management company. The reporting and governance policies, however, need to be clear and consistent in any case. The stress scenarios and the monitoring frequency should be suitable to the individual fund. Above all, the assessment of the liquidity risk should base on the individual company’s own considerations – there is no one-fits-all approach to liquidity stress tests. The asset management companies will have to face the continuous challenge of using the most efficient instruments for liquidity risk management.

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