EUROPEAN UNION: ESMA Respond to EIOPA Questions on AIFMD

Tuesday August 7 2018

On 7th August 2018, the European Securities and Markets Authority (ESMA) sent a letter to the European Insurance and Occupational Pensions Authority (EIOPA) in response to certain AIFMD-related questions raised by EIOPA relating to the AIF definition and leverage.

ESMA responds to the questions raised by EIOPA under section 11.5.2. of its second set of advice to the European Commission on specific items in the Solvency II Delegated Regulation (EIOPA-BoS-18/075). In this context, EIOPA addressed several questions to ESMA with respect to the AIF definition and leverage calculation pursuant to the Alternative Investment Fund Managers Directive (AIFMD) and its implementing measures.

The queries are summarised as follows:

1. Are Alternative Investment Funds (AIFs) that use

a) borrowing arrangements pursuant to Article 6(4) of Commission Delegated Regulation (EU) No 231/20132

b) derivative instruments pursuant to Article 8(7) of Commission Delegated Regulation (EU) No 231/2013 considered as ‘leveraged’ under the AIFMD?

2. Are AIFs that are managed by AIFMs as defined in Article 3(2) of the AIFMD (often referred to as “registered” or “sub-threshold” AIFMs) to be considered as ‘AIFs’ as defined in Article 4(1)(a) of the AIFMD?

With regard to question 1 a), Article 6(4) of the Commission Delegated Regulation (EU) No 231/2013 lays down the general provisions on the calculation of leverage and states that:

AIFMs shall exclude borrowing arrangements entered into if these are temporary in nature and are fully covered by contractual capital commitments from investors in the AIF.

Therefore, ESMA is of the view that AIFs using borrowing arrangements which comply with these conditions should be considered unleveraged.

With regard to question 1 b), it is worth noting that the AIFMD does not include formal legal definitions of the notions ‘leveraged AIFs’ or ‘unleveraged AIFs’. The Commission Delegated Regulation (EU) No 231/2013 sets out that in order to receive appropriate information for monitoring systemic risks and to gain a complete picture of the use of leverage, information about the exposure of AIFs should be provided to competent authorities and investors both on a gross and on a commitment method basis and all AIFMs should therefore calculate exposure using both the gross and the commitment method. The gross method gives the overall exposure of the AIF whereas the commitment method gives insight in the hedging and netting techniques used; therefore both methods shall be seen in conjunction and provide valuable information to national competent authorities and ESMA3 . In this context, recital 11 of the Commission Delegated Regulation (EU) No 231/2013 states the following:

In order to ensure a uniform application of AIFM obligations to grant an objective overview of the leverage used, it is necessary to provide two methods to calculate the leverage. As it results from market studies, the best results can be achieved by combining the so-called ‘gross’ and ‘commitment’ methods.

This principle is reflected in the legal text of the Commission Delegated Regulation (EU) No 231/2013 which provides in Article 6 that leverage of an AIF shall be expressed as the ratio between the exposure of an AIF and its net asset value and that AIFMs shall calculate the exposure of the AIFs managed in accordance with the gross method as set out in Article 7 and the commitment method as set out in Article 8.

Consequently, the gross method laid down in Article 7 of the Commission Delegated Regulation (EU) No 231/2013 does not exclude currency hedging for the purposes of calculating exposure, whereas pursuant to Article 8(7) financial derivative instruments used for currency hedging purposes are excluded from the calculation of exposure under the commitment method provided that they do not add any incremental exposure, leverage or other risks.

With regard to question 2, AIFMs below the thresholds set out in Article 3(2) of the AIFMD are subject to registration with the competent authorities of their home Member State and shall provide the information set out in Article 3(3). However, national rules may impose stricter requirements (e.g. the full AIFMD authorisation regime). Notwithstanding the aforesaid, all collective investment undertakings managed by these managers should be considered as ‘AIF’ provided that they meet the definition set out in 4(1)(a) of the AIFMD.

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