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EFAMA, ICMA: ‘no systemic risk’ from leverage in EU-based funds

Global regulators’ work on leverage and systemic risk in investment funds should use the existing European regulatory framework when addressing these issues, according to two European industry associations.

In a joint report, the European Fund and Asset Management Association (EFAMA) and the asset management and investors council of the International Capital Market Association (ICMA) argued that the European legislative regime “offers a robust framework” to address risks related to leverage in investment funds.

The associations said EU rules for alternative investment fund managers and UCITS funds had “allowed regulators to ascertain that leverage levels remained relatively low and constant over time and that wider regulatory framework governing European investment funds has not led to potential systemic risk occurring in EU-domiciled investment funds since the crisis”.

Citing rules and legislation for UCITS, alternative investment funds, and derivatives, EFAMA and ICMA said European regulators were already able to assess levels of leverage in funds and “take appropriate supervisory actions”.

Levels of leverage have remained constant in recent years and there has been no systemic risk related to the use of leverage in EU-domiciled funds, according to the associations.

The Financial Stability Board has been investigating whether the asset management sector could pose a danger to financial stability, with leverage forming part of its concern about systemic risk in investment funds.

Earlier this year it set out policy recommendations for tackling “structural vulnerabilities” of asset managers, with leverage one of the risks covered. The International Organization of Securities Commissions (IOSCO) has been charged with evaluating the recommendations and considering next steps.

Peter de Proft, EFAMA director general, said European regulation was “a cutting-edge framework at global level and [we] hope that IOSCO and the FSB 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,” he said.

Martin Scheck, chief executive of ICMA, said there was an “advanced technical framework already in place in Europe”.

“We believe this work should help the ongoing debate on systemic risk in investment funds and should promote sensible solutions based on existing rules and practices,” he said.

The associations recommended that existing EU regulatory standards should be the basis for developing a “matrix” of different measures of leverage and risk.

“No single measure can capture all the risk in nature, size and characteristics associated with a fund’s underlying assets and strategies,” the associations argued.

EFAMA and ICMA added: “Not all funds are relevant from a systemic point of view. In fact, very few of them present characteristics that need a more detailed scrutiny… Second, we should not forget that – at least in Europe – the risk that investment funds represent for their counterparts is already addressed by reporting requirements to national regulators. In addition, such risk is also addressed by prudential requirements in other existing regulatory frameworks that apply in combination with the regulation on leverage.”

They also recommended that the existing EU framework guide any further streamlining of global calculation methodologies for leverage and risk.

The paper can be found here

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