Leverage under the AIFMD: some rare guidance

• United Kingdom

• Financial services and markets regulation
• Investment funds and asset management
• Financial services

08-08-2018

On 7 August 2018, ESMA published a letter from Steven Maijoor, ESMA Chair, to Gabriel Bernardino, EIOPA Chair.

The letter addressed the question of whether ESMA would consider borrowing arrangements and derivative arrangements entered into by an Alternative Investment Fund to be "leveraged" under the AIFMD.

It also addressed a question about “sub-threshold” AIFS.

While the responses seem uncontroversial and unsurprising, formal ESMA guidance is helpful for market participants and their advisers alike.

To read the ESMA letter, click here.

Question 1(a)

Are AIFs that use borrowing arrangements pursuant to Article 6(4) of Commission Delegated Regulation (EU) No 231/20132 (the “Level 2 Regulation”) ‘leveraged’ under the AIFMD?

The response notes the words in Article 6(4) of the Level 2 Regulation: “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.”

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

Question 1(b)

Are AIFS that use derivative instruments pursuant to Article 8(7) of the Level 2 Regulation ‘leveraged’ under the AIFMD?

The response notes that the AIFMD includes no formal legal definitions of ‘leveraged AIFs’ or ‘unleveraged AIFs’. The Level 2 Regulation requires an AIFM to provide information to national authorities and investors about the relevant AIFs’ exposure through leverage both on a gross and on a commitment method basis. The gross method gives the overall exposure of the AIF whereas the commitment method gives insight in the hedging and netting techniques used. The text of the Level 2 Regulation develops this requirement by stating that leverage of an AIF must be expressed as the ratio between the exposure of an AIF and its net asset value. Therefore, the gross method does not exclude currency hedging for the purposes of calculating exposure, whereas 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.

ESMA goes no further but the conclusion to be deduced from this is that an AIFM’s use of derivatives results in an AIF being leveraged.

Question 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?

The response confirms that sub-threshold AIFs are still, by definition, “AIFs”. It also notes that, whereas the only requirements imposed on sub-threshold AIFs are those in Article 3(3) of the AIFMD, national competent authorities are free to impose further requirements, e.g. full authorisation.

How Eversheds Sutherland can help

Our lawyers and consultants have advised countless EU and non-EU fund managers on managing AIFs and through our IFN service have assisted with registrations and approvals worldwide.

We would be happy to discuss how we can help you comply with EU law and regulation in a practical manner.