ESRB Recommendation on leverage and liquidity in investment funds

On 14 February 2018, the European Systemic Risk Board (ESRB) published a Recommendation on action to address systemic risks related to liquidity mismatches and the use of leverage in investment funds. The ESRB considered a number of risks that may stem from the increasing role played by investment funds in financial intermediation and could result in the amplification of any future financial crisis.

The Recommendation, which takes into account ongoing international and European initiatives on macroprudential policy in this area, is addressed to the European Securities and Markets Authority (ESMA) and the European Commission. It focuses on five areas where the ESRB sees a need for ESMA to provide supervisory authorities with guidance on applying the macroprudential elements of the current regulatory framework and/or for legislative changes to be made. The Recommendation advocates a proportionate framework for managing the systemic risks that can arise in, or be propagated by, the investment funds sector, while maintaining the key redemption features that attract investors to open-ended investment funds and facilitate collective investment.