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Alternative Market Briefing

Other Voices: ESMA proposes formal limits to leverage potentially affecting alternative funds

Tuesday, March 31, 2020

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Bill Prew
Bill Prew, CEO of INDOS Financial, a UK-based independent fund depositary and oversight business, has flagged the following new regulatory proposals potentially impacting alternative investment funds:

There was an interesting consultation published by ESMA on 27 March on how regulators should address leverage risks in the Alternative Investment Fund (AIF) industry. The consultation is in response to the recommendations of the European Systemic Risk Board (ESRB) in April 2018 to address liquidity and leverage risk in investment funds (in particular, the extent to which the use of leverage within AIFs contributes to the build-up of systemic risk in the financial system, and to give guidance on macroprudential leverage limits).

The most eye-catching part of the proposals is a requirement that regulators "should impose leverage limits" on funds (or groups of funds) that they consider "pose risks to financial stability".

Whilst AIFMD has always allowed regulators to set leverage limits, to our knowledge regulators have not imposed limits since AIFMD was first introduced in 2014 - managers have been free to set the maximum level of leverage which they believe are "reasonable".

Regulators will need to base their assessments on the Annex IV regulatory reporting they receive from managers. The proposals not only focus on those AIFs that employ substantial leverage (defined by AIFMD as when an ......................

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