The European Securities and Markets Authority (ESMA) published the final guidance on leverage risk in AIF under the Article 25 of the Alternative Investment Fund Manager Regulation (AIFMD, Directive 2011/61/EU) on 17 December 2020. This guidance is driven by European Systemic Risk Board (ESRB) and the published recommendation in April 2018. The guideline is in particular focus on leverage-related systemic risk. The guideline will enter into force two months after the official EU languages transations are published on ESMA’s website. We expect this in the next few weeks.
The guideline requests the National Competent Authorities (NCAs) to apply risk assessments to alternative Investment Funds (AIF) managed by the AIFMs under their jurisdiction using the data reported from AIFMD (Annex IV reports) and other sources under a two-steps approach on quarterly basis. NCAs should communicate the risk assessments to ESMA at least on an annual basis. NCAs should communicate the risk assessments to ESMA at least on an annual basis.
NCAs are requested to identify AIFs that a most likely to pose risks to the financial systems based on the leverage risk and the asset under management. The NCAs will also compare the AIF’s leverage with the average leverage of AIFs of the same types or historical leverage value of the same AIF in order to detect “unusually high use of leverage”. NCAs may set leverage limit to selected AIFs where necessary.
What does the new guideline bring to the AIF sector?
1. AIFMs shall pay attention if their AIFs have substantial high leverage (Article 111(1) of level 2 regulation).
2. AIFMs shall pay attention if the leverage value of their AIF differs significantly to the historical average value, or the average leverage of the same investment types.
3. The Annex IV report information shall be consistent, especially Assets under management, leverage figures, individual exposure, turnover, portfolio liquidity profile and investor liquidity profile.
4. AIFM may need to report periodically to NCAs on market risk of the AIFs such as VAR, Vega exposure, Net FX delta, Net commodity Delta.
5. Exposures to counterparties such as banks and insurance companies will be accessed by cross checking with EIOPA (European Insurance and Occupational Pensions Authority) and EBA (Europäische Bankenaufsichtsbehörde).
What are the consequences for your reporting?
The AIFM have to provide always consistent data in the report, especially with the AuM (Asset under management) and leverage figures.
1.Special controls to the reporting content, such as compare the current leverage figures over the historical average are obligatory for the AIFM.
2.The regulator may apply stricter control over the report content such as Turnover (AIF 126-127), Portfolio liquidity profile (AIF 178 – 184), Investor liquidity profile (AIF 186 – 192) and source of leverage obtained (AIF 283 – 286). (AIF 283 – 286).
3. It is necessary to review the instrument asset sub types on an regularly basis to avoid verification feedback from the NCAs.
With acarda’s AIFMD SaaS solution we assure consistent figures via cross checks and validation rules with country specific add-ons to be compliant before the report goes to the various regulators. You can also trace back backup-data and historical reports and resend them if necessary, within 24 hours.
More information on our regulatory platform and the AIFMD reporting solution is available here: https://acarda.de/en/services-solutions/compliance-reporting/aifmd-annex-iv/
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