The paper 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 efficient management of their portfolio.
This report addresses the theme of leverage as it forms a significant part of the international regulatory concern about systemic risk in investment funds. The FSB and IOSCO seek to identify consistent measures of leverage to facilitate more meaningful monitoring for financial stability purposes.
The report explores and describes how the European legislative regime, notably the UCITS and AIFMD legislative frameworks, but also other rules in EMIR, for instance, offers a robust framework to address the risks related to leverage in investment funds.
Recent years show that the EU regulatory framework is 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.
The report also puts forward a number of recommendations to improve monitoring and analysis of leverage risk:
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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.
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Further streamlining of global calculation methodologies for leverage and risk. Regulators should in that respect rely upon the existing EU regulatory regime.
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Adjustments and updates of these methods, particularly the 2010 CESR Guidelines, based on the best practices at EU level, could be envisaged if necessary.
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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.
Press release
Joint paper
© EFAMA - European Fund and Asset Management Association
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