Leverage risk remains relatively benign from a systemic point of view, but there is still an identifiable need to improve the monitoring and oversight of leverage risk as it affects funds and asset management, according to the latest joint paper published by the European Fund and Asset Management Association and the Asset Management and Investors Council.
Efama, representing the region’s asset management associations, and Amic, representing buy side members of the International Capital Market Association, have sought to understand why leverage is used in investment funds in Europe, how firms address related risks, and what tools are used to measure leverage and improve portfolio efficiency.
Included in the research were analyses of sources of leverage such as borrowings – described as “physical” leverage – and use of derivatives – “synthetic” leverage. Tools assessed for their ability to measure leverage included: the commitment method, the gross method and the Value at Risk (VaR) method.
The report also looked into regulations such as Ucits, AIFMD and Emir offer a framework to address and manage risks related to leverage in investment funds.
From the work done, Efama and Amic have jointly made a number of recommendations:
- 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.
Peter de Proft, Efama director general, said: “Efama and ICMA consider that the existing EU regulatory framework is regulating in a consistent way the use of leverage in investment funds, along with key related topics, such as: the mandatory disclosures to investors, the reporting requirements to the regulators and the monitoring of leverage by regulators for systemic risk purposes. We firmly believe European regulation is a cutting-edge framework at global level, and hope that Iosco and FSB regulators use it as the benchmark and starting point 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.”
Martin Scheck, ICMA chief executive, added: “This study complements last year’s work by Amic and Efama on liquidity risk management and is designed to highlight the advanced technical framework already in place in Europe regulating the use of leverage in investment funds. 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.”
Click here to read the full report: 170719_AMIC EFAMA leverage paper