Steven Maijoor Opalesque Industry Update - ESMA publishes today a consultation paper (ESMA/2011/209) setting out its proposals for the detailed rules underlying the Alternative Investment Fund Managers Directive (AIFMD). This is in response to the request for assistance which the European Commission sent to ESMAs predecessor, CESR, in December 2010. ESMA has to deliver its final advice to the Commission by 16 November 2011.
Steven Maijoor, Chair of ESMA, said: Delivery of the advice to the Commission on the AIFMD is one of ESMAs top priorities for 2011 and todays publication is a crucial step in achieving that objective. Indeed when finalised, these rules will increase transparency for investors and supervisors, and will significantly contribute to tackling the potential build-up of systemic risk. Input from all stakeholders to this consultation will be particularly vital for ESMA in shaping the final rules that will govern the European alternative investment fund industry.
The proposals published in ESMAs consultation paper (CP) today cover three broad areas:
1. General provision for managers, authorisation and operating conditions
As well as clarifying certain issues regarding the thresholds that determine whether a manager is subject to the Directive, this section includes such topics as valuation and delegation. On the issue of valuation, ESMA sets out draft advice on criteria for the proper valuation of assets by identifying general principles that should guide managers in developing and implementing policies and procedures for a proper and independent valuation of the assets of an alternative investment fund (AIF). As these are general princi-ples, they can be adapted to the types of asset in which an AIF may invest.
As far as delegation is concerned, ESMA has been asked to identify the criteria for objective reasons justi-fying a delegation. Here the proposals set out two options for consultation: the first takes a flexible ap-proach according to which a delegation can be justified where the manager can demonstrate that the delegation is done for the purposes of a more efficient conduct of the management of the fund; while the second option sets out an indicative, non-exhaustive list of criteria to be used when making the assessment.
2. Governance of AIFs depositaries
This part of the advice sets out ESMAs proposals on the framework governing depositaries of AIFs. In addition to the advice on the content of the written contract evidencing the appointment of the depositary and the clarification on the depositarys oversight duties, ESMA makes proposals on the key issue of de-positary liability. The first element of this relates to the circumstances in which a financial instrument held in custody should be considered as lost; this assessment is crucial in determining whether a depositary must subsequently return an asset. ESMAs proposals identify three conditions, at least one of which would have to be fulfilled in order for an asset to be considered lost. Another important concept which ESMAs advice aims to clarify relates to which events would constitute external events beyond the reason-able control of the depositary. Finally, the advice considers options for the objective reasons that would allow a depositary to contractually discharge its liability, such as legal constraints that give the depositary no choice but to delegate its custody duties to a third party.
3. Transparency requirements and leverage
One of the key objectives of the AIFMD is to help prevent the build-up of systemic risk. With this aim in mind, ESMAs proposals cover several issues related to leverage e.g. the definition of leverage, how it should be calculated and in what circumstances a competent authority should be able to impose limits on the leverage a particular manager may employ. Given the wide range of funds covered by the Directive and the diverse nature of the assets in which such funds invest, ESMA considers it appropriate to prescribe two different calculation methodologies for the leverage (commitment and gross methods) as well as a further option that can be used by managers on request and subject to certain criteria.
The AIFMD also aims to increase transparency of alternative investment funds and managers. In this context, ESMAs advice specifies the form and content of information to be reported to competent authori-ties and to investors. The advice also addresses the content and format of the annual report to be prepared for each fund. In this regard, ESMAs approach has been to recognise the existence of national and inter-national accounting standards already in place and to develop a compatible framework.