01 February 2019

ICMA AMIC Response to IOSCO report: Leverage consultation paper

AMIC supports the work or IOSCO to examine risks associated with leverage in investment funds. This approach at each fund level is a welcome focus on the potentially risky activities of asset managers as compared to an approach at management company level.

Furthermore, ICMA supports the approach by IOSCO to develop a two-step framework for assessing risk associated with leverage. It makes sense to screen investment funds in a first step to assess leverage and as the second step allow competent authorities in each jurisdiction to focus on the risk profile of a narrower number of funds. Most mutual funds, for example, will not have a high leverage by law. In Europe, most alternative funds also have low leverage.

The design of the first step, therefore, is of key importance and is rightly the most important focus of the consultation. However, ICMA is not convinced that some of the methodological choices in the proposed framework will achieve the objectives sought. AMIC believes that a simple GNE approach combined with NNE filtering is the best Step 1 framework for simplicity and cross-border comparison purposes. Therefore, while the “adjusted GNE” approach outlined by IOSCO has theoretical benefits, AMIC does not believe it should be used in the Step 1 process. Equally, the suggested “additional data points” apart from those on portfolio composition are not necessary to design the Step 1 framework.

Also, the regulatory purpose behind the second step seems underemphasised in the paper. While ICMA supports a principles-based approach to the Step 2 framework, it is very important that jurisdictions do not diverge too much in how to proceed with funds in Step 2. The risk is that without guidance jurisdictions could end up stigmatising Step 2 funds rather than seeing it as framework for a more detailed risk-based analysis of risk, recognising that leverage as a concept is not synonymous with risk. Furthermore, AMIC has some concerns with the potential counterparty risk analysis tool in the second step.

Full response

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