EFAMA and AMIC launch joint report on fund leverage in Europe

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The European Fund and Asset Management Association (EFAMA) and Asset Management and Investors Council (AMIC) have published a joint report, analysing the use of leverage in investment funds in Europe.

The paper was published on the 19 July. It analyses how and why leverage is used in investment funds in Europe, how firms address in practice-related risks and the technical tools used to measure leverage and improve the management of their portfolio.

The report also addresses international regulatory concern about systemic risk in investment funds.

The European legislative regime, notably the UCITS and AIFMD legislative frameworks, and other rules already offers a robust framework to address leverage risks, EFAMA claimed in their statement announcing the report.

EFAMA said that in recent years the EU regulatory framework has been “sound and efficient” as it allows European regulators to assess levels of leverage in funds and take appropriate supervisory actions.

Furthermore, levels of leverage have remained constant and there has been no systemic risk related to the use of leverage in EU-domiciled funds, EFAMA said.

Basis for investment

Peter de Proft, EFAMA director general, said he considers EU regulation to be “cutting-edge framework at a global level” and hopes that IOSCO and FSB regulators use it as a benchmark for their work.

“This will allow them to deliver their mandate and propose a consistent matrix of different measures that can capture the broad universe of fund vehicles and investment strategies,” de Proft said. 

Martin Scheck, chief executive of the Investment Capital Markets Association noted that this report supports last year’s work by AMIC and EFAMA on ‘liquidity risk management’.

“We believe this work should help the on-going debate on systemic risk in investment funds and should promote sensible solutions based on existing rules and practices,” Scheck said.

 The report proposed a number of recommendations to improve monitoring and analysis of leverage risk:

  • The existing regulatory standards at the EU level can be the basis for developing, at global level, leverage and risk measurements through a matrix of different measures. This would allow a meaningful representation of a fund’s exposures, given that there is no single measure that can capture all the risks in nature, size and characteristics associated with a fund’s underlying assets and strategies.
  • Further streamlining of global calculation methodologies for leverage and risk. Regulators should in that respect rely upon the existing EU regulatory regime.
  • Adjustments and updates of these methods, particularly the 2010 CESR Guidelines, based on the best practices at EU level, could be envisaged if necessary.
  • Data sharing among regulators of already reported data is key and should be improved at both EU and global level. This would enable regulators to better assess the overall risks related to funds in Europe and globally.

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