Stress tests are a major part of risk management for asset management companies. Regular stress testing is mandatory under national and European regulations, but the methods used vary according to the investment strategies and assets managed. The Financial Markets Authority (AMF) has prepared a guide to help asset management companies implement and use stress tests. The consultation period for the guide runs until 30 September 2016.
Two years after the AIFM Directive entered into force, the AMF met with asset management companies of different sizes and from different sectors to analyse how they currently go about conducting stress tests. The AMF analysed the conditions under which stress tests are implemented and used, and how they fit into the procedures for managing market and liquidity risk.
The AMF wants to assist management companies in the implementation and use of stress tests by publishing a guide that presents best practices which could usefully be generalised, particularly regarding the implementation of:
- stress tests that simulate problems on both the assets and liabilities sides of a fund;
- stress tests across all funds managed by a management company;
- a stress-testing policy that explains the procedures to follow if alert thresholds are triggered and how the results should be disseminated within the asset management company; and
- the use of stress tests during the various stages of a fund’s life, from creation and liquidation to ongoing risk management.
The guide reminds companies that stress tests should be used as part of a global risk management policy and that they should therefore be regularly updated and tailored to each fund.