On 27 March 2020, the European Securities and Markets Authority (ESMA) issued a public consultation on draft guidelines to address leverage risks in the alternative investment fund sector. The consultation has been drafted in response to a recommendation by the European Systemic Risk Board for ESMA to produce guidance on Article 25 of the Alternative Investment Fund Managers Directive (AIFMD).

Article 25(1) of the AIFMD provides that Member States shall “ensure that the competent authorities of the home Member State of the alternative investment fund manager (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 draft guidelines relate to the assessment of leverage-related systemic risk and aim to ensure that Member State national competent authorities (NCAs) adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met.

In order to ensure that NCAs take a consistent approach in the assessment of leverage-related systemic risk, the draft guidelines include:

  • a common minimum set of indicators to be taken into account by NCAs during their assessment;
  • the instructions to calculate such indicators based on the reporting data under Article 24 of the AIFMD; and
  • qualitative and, where appropriate, quantitative descriptions of the interpretation of the indicators.

ESMA will consider the feedback it receives to the public consultation by 1 September 2020 with a view to finalising the guidelines for publication.

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