ESMA publishes Consultation Paper on draft Guidelines addressing leverage risk in the AIF sector

On the 27 March 2020, the European Securities and Markets Authority (“ESMA”) issued a Consultation Paper on its draft Guidelines issued in relation to the leverage risks in the Alternative Investment Fund (“AIF”) sector (the “Guidelines”).

The Guidelines proposed are part of ESMA’s response to the proposals of the European Systemic Risk Board published in April 2018, addressing liquidity and leverage risk in investment funds. By means of the Consultation Paper, ESMA is looking to obtain feedback on the proposed principles to set leverage limits under Article 25 of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers(the “AIFMD”).

ESMA noted that Alternative Investment Fund Managers can utilise both financial leverage, including through securities financing transactions and borrowing as well as synthetic leverage through the use of derivatives. The objective of the Guidelines proposed ensure that National Competent Authorities (“NCAs”) endorse a consistent approach when assessing whether the conditions for imposing leverage-related measures are met.

In this regard, the proposed Guidelines include the following:
(a) a common minimum set of indicators to be considered by NCAs during their assessment; and
(b) the instructions to calculate such indicators based on the reporting data under Article 24 of the AIFMD.

Alternative Investment Fund Managers and their trade associations are invited to give their feedback to the Consultation Paper on the draft Guidelines by not later than 1 September 2020.

Feel free to contact us should you require further information in relation to the AIFMD.