ECB’s opinion on the AIFM: international coordination is needed.
26 October 2009
The ECB called on the Commission to continue the dialogue with its international partners on the AIFM. If the AIFM is not coordinated on an international basis, regulatory arbitrage will appear. The definition of ‘leverage’ does not include specific lever
ECB’s general observations on AIFM are the following:
· The ECB supports the intention to provide a harmonised regulatory and supervisory framework for the activities of alternative investment fund managers (AIFMs) in the European Union. The proposed provisions on reporting to the competent authorities should, in principle, contribute significantly to enhancing financial stability monitoring and thus to better informed assessments of the risks to financial stability connected with the activities of AIFMs and the Alternative Investment Funds (AIFs) that they manage. The harmonisation of rules and the resulting passport should benefit financial integration by improving the level playing field in the EU.
· The ECB urges the Commission of the European Communities to continue the dialogue with its international partners, in particular the United States, to ensure a globally coherent regulatory and supervisory framework. As noted by the Eurosystem in its contribution to the Commission’s consultation on hedge funds, an internationally coordinated response is necessary given the highly international nature of the industry and the consequent risks of regulatory arbitrage and evasion. This might help to ensure that the requirements in third countries for AIFMs are equivalent to those to be put in place in the EU and that non-EU domiciled AIFMs could benefit from access to the EU markets on a reciprocity basis.
· Recital 3 of the proposed directive identifies, as one of its central objectives, the establishment of a framework capable of addressing the risks ‘to investors, other market participants and markets’ posed by AIFs by ‘taking into account the diverse range of investment strategies and techniques employed by AIFM’. In this respect, it is noted that the proposed directive would concern all types of funds not covered by Directive 2009/…/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast)3 such as hedge funds, commodity funds, open-ended real estate funds, listed closed-ended funds, private equity funds and venture capital funds. Such funds form a heterogeneous group of investment pools, organised under various legal forms in different jurisdictions, both within and outside the EU. In this respect, the provisions of the proposed directive could be tailored in a way that better reflects fundamental differences between AIFs.
· All central banks should be expressly excluded from the scope of the proposed directive.
· More generally, the ECB sees a potential risk of regulatory arbitrage between AIFMs, insurance companies and credit institutions, among which the proposed directive does not create a level playing field. Except for the AIFM’s management of its own assets, requirements under the proposed directive should be coherently applied to AIFMs, credit institutions and insurance companies. In the same vein, the proposed directive does not specify ‘fit and proper’ criteria and minimum experience requirements for an AIFM’s senior managers and executives. For level playing field reasons, the ECB therefore suggests inserting provisions to this effect in the proposed directive in line with similar provisions in other areas of the EU financial acquis.
· The ECB notes that certain provisions in the proposed directive (for example, those related to short selling, securitisation and the acquisition of a controlling influence in companies) are intended to regulate horizontal issues that concern all market participants, and not just AIFMs. While the ECB understands the rationale for certain of those provisions, the ECB would suggest considering instead introducing such provisions only by means of legislation that maintains the level playing field among various market participants, for instance by inserting such provisions in existing EU legislation applicable across sectors.
· The ECB welcomes, in principle, the provisions relating to the reporting obligations of AIFMs (who would be required to provide high-quality information to the competent authorities) and the mechanisms for the exchange of information between supervisory authorities. The ECB however suggests that an in-depth analysis should be undertaken in order to focus reporting obligations on data that can reasonably be expected to be relevant for monitoring financial stability, to ensure the consistency of data reporting obligations with the legal framework that will establish the European Systemic Risk Board (ESRB) and the European System of Financial Supervisors (ESFS), and to enable these bodies to obtain supervisory information necessary and appropriate to fulfil their respective tasks4. While the focused reporting obligations that result from this analysis should be reflected in the proposed directive, further specification would also be possible through comitology. The ECB stands ready to assist in the analysis.
· Due consideration could also be given to aligning certain requirements to report to the competent authorities (as specified in draft Articles 21 and 24) with those of Regulation ECB/2007/8 of 27 July 2007 concerning statistics on the assets and liabilities of investment funds.
· The concept of leverage is fundamental to the business model implemented by many AIFMs. The definition of ‘leverage’ under the proposed directive does not, however, include specific leverage ratio concepts. The ECB is concerned that, without additional clarifications inserted into the text of the proposed directive, it may be difficult to implement the proposed definition. Implementing measures in this area should benefit from the technical contributions of central banks and non central bank supervisors.
· Article 25(3) of the proposed directive provides that the Commission shall adopt implementing measures setting limits on the level of leverage that AIFMs can employ, taking into account, inter alia, the type of AIF, its investment strategy and the sources of leverage. The ECB acknowledges that leverage can create important risks for financial stability. Owing to their investment flexibility, AIFMs can play an important role in supporting financial market liquidity, thereby contributing to effective financial market functioning and price discovery. Maintaining this role calls for balanced and appropriately risk-adjusted leverage limits applicable to AIFs that take their full risk profile into account while not excessively hindering their investment flexibility.
· The ECB stands ready, if warranted, to offer further views on any revised draft that becomes available. Where the ECB recommends amending the proposed directive, specific drafting proposals are set out in the Annex accompanied by an explanation. The majority of these proposals do not address the more general observations made above.
© ECB - European Central Bank
