Hedgeweek also reports that short selling also comes under the AIFM microscope. An ECON committee working document proposes inserting a clause that will require the European commission to amend its market abuse directive to harmonise short selling across the EU and ban naked short selling.
Ucits legislation governing custodians could be brought in line with the European Union’s alternative investment fund managers (AIFM) directive if the latest parliamentary proposals are approved in May.
Jean-Paul Gauzès, the rapporteur guiding the directive through the European parliament's committee for economic and monetary affairs, has negotiated a compromise which would mean a revision to the Ucits IV directive, due to be implemented by EU member states in July 2011.
Advertisement
A number of lobbyists and politicians had previously suggested that the reverse should happen and that the AIFM legislation should follow the example set by Ucits.
A working document, seen by Hedge Funds Review and dated April 14, 2010, sets out the amendments to the directive agreed between Gauzès and the four shadow rapporteurs. It proposes funds appoint independent depositaries who would be responsible for custodial and valuation duties.
A contentious aspect throughout negotiations on the directive has been the extent of depositary liability. The latest document sets out a provision whereby the depositary would be liable for any losses suffered by a fund except where the loss was a result of an unforeseeable external event. However, the burden of proof is placed firmly on the depositary to prove that it could not avoid the loss.
If depositary duties are delegated to a third party, for instance a sub-custodian, the depositary would have to prove that it had carried out "due skill, care and diligence" in the selection of that third party.
The compromise also sets out the information a fund manager would have to provide to regulatory authorities, including the proportion of a fund's illiquid assets, the level of leverage employed by funds and the use of any short selling.
Regulatory authorities within European member states would be required to forward information "necessary for systemic risk supervision" on to the new European Securities and Markets Authority (Esma).
Leverage thresholds
Fund managers would also be required to set leverage limits for each fund they manage, taking into account strategies, counterparty risk and the source of the leverage. Regulators would have to ensure those limits were "reasonable" in order to limit systemic risk and market impact.
A recent report produced by the UK Financial Services Authority (FSA) suggested that leverage currently employed by hedge funds was not at a sufficient level to pose systemic risk and was also not sufficient to pose counterparty risk issues.
Short selling also comes under the AIFM microscope. The working document proposes inserting a clause that will require the European commission to amend its market abuse directive to harmonise short selling across the EU and ban naked short selling. Market participants would be required to report net short positions "when certain thresholds are crossed".
Gauzès's proposals on the marketing of funds domiciled outside the EU were not in the working document.
French and German finance ministers Christine Lagarde and Wolfgang Schäuble have spoken out in favour of institutional investors being allowed to invest in hedge funds. In an opinion piece in the Wall Street Journal the pair said France and Germany believed in open financial markets.
Alternative Investment Management Association (Aima) CEO Andrew Baker said he welcomed Lagarde and Schäuble's comments but the current texts of the directive did not reflect their sentiments.
The parliamentary committee is due to vote on the amended directive on May 10.
© Hedgeweek
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article