On 27 March 2020, the European Securities and Markets Authority (ESMA) announced a public consultation on its draft guidelines (the "Guidelines") on article 25 of Directive 2011/61/EU on alternative investment fund managers (the "AIFMD") related to leverage risks in the alternative investment funds sector. The consultation is a part of the ESMA's response to the recommendations of the European Systemic Risk Board (ESRB) published in April 2018 on liquidity and leverage risk in investment funds.
The objective of the Guidelines is to establish consistent and effective supervisory practices within the European System of Financial Supervision and to ensure the common, uniform and consistent application of Article 25 of the AIFMD.
Article 25(1) of the AIFMD provides that Member States shall “ensure that the competent authorities of the home Member State of the AIFM use the information to be gathered under Article 24 for the purposes of identifying the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system, risks of disorderly markets or risks to the long-term growth of the economy”.
The Guidelines relate to the assessment of leverage-related systemic risk and aim at ensuring that the National Competent Authorities adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met. They set out a two-step approach that NCAs should adopt when carrying out their risk assessment: firstly identifying the level, source and different uses of leverage and secondly identifying leverage related systemic risk. The Guidelines suggest that NCAs carry out the assessment on a quarterly basis and use a range of qualitative and quantitative data.
ESMA invites comments on all matters referred to in the Guidelines and in particular on the specific questions summarised in Annex I. Comments should respond to the question stated, indicate the specific question to which the comment relates and describe any alternatives ESMA should consider (if any). All contributions should be submitted online at www.esma.europa.eu using the dedicated Response Form by 1 September 2020.