On 7 August 2018, the European Securities and Markets Authority (ESMA) published a letter regarding the interpretation of the Alternative Investment Fund Managers Directive (AIFMD). The letter addresses three queries raised by European Insurance and Occupational Pensions Authority (EIOPA).

The first query is broken down into two parts concerning whether:

• alternative investment funds (AIFs) that use borrowing arrangements pursuant to Article 6(4) of Commission Delegated Regulation (EU) No 231/2013 (the Regulation) are considered ‘leveraged’ under the AIFMD ? ESMA takes the view that AIFs using borrowing arrangements which comply with the conditions of Article 6(4) of the Regulation should be considered unleveraged; and
• AIFs that use derivative instruments pursuant to Article 8(7) of the Regulation are considered ‘leveraged’ ? ESMA notes that the AIFMD does not include formal legal definitions of the notions ‘leveraged AIFs’ or ‘unleveraged AIFs’. ESMA explains that to gain a complete picture of the use of leverage under the Regulation, information about the exposure of AIFs should be provided to Member State 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 (as per recital 11 of the Regulation). 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.

The second query concerns whether AIFs that are managed by alternative investment fund managers (AIFMs) as defined in Article 3(2) of the AIFMD (often referred to as “registered” or “sub-threshold” AIFMs) should be considered as AIFs as defined in Article 4(1)(a) of the AIFMD.  ESMA states that AIFMs below the thresholds set out in Article 3(2) of the AIFMD are subject to registration with the home Member State competent authority and shall provide the information set out in Article 3(3) AIFMD. However, a Member State’s domestic rules may impose stricter requirements like full AIFMD authorisation. Notwithstanding this, all collective investment undertakings managed by these managers should be considered as AIFs provided that they meet the definition set out in 4(1)(a) of the AIFMD.