ESMA Updates AIFMD Q&As
The European Securities and Markets Authority (ESMA) has updated its Questions and Answers on the application of the Alternative Investment Fund Managers Directive (AIFMD).
Specifically, ESMA has added two new Q&As, providing clarification on the calculation of leverage under AIFMD:
- The treatment of short-term interest rate futures for the purposes of AIFMD leverage exposure calculations according to the gross and commitment methods
- The required frequency of the calculation of leverage by an AIFM managing an EU AIF which employs leverage.
Question 6 [Last update 29 March 2019]: Should the calculation of leverage exposure of an AIF resulting from a short-term interest rate future be adjusted for the duration of the future, under the gross and the commitment methods?
Answer 6 [Last update 29 March 2019]: No. The calculation of leverage exposure of an AIF resulting from a short-term interest rate future should not be adjusted for the duration of the future. Subparagraph (a) of paragraph (1) of Annex II of the Commission Delegated Regulation (EU) No 231/2013 sets out the method to be applied, when converting all interest rate futures into equivalent positions in the underlying asset in the process of calculation of exposure of the AIF, as the product of the number of contracts and the notional contract size. The duration of the financial instrument should not be considered for the purpose of that calculation.
This does not, however, preclude AIFMs managing AIFs that, in accordance with their core investment policy, primarily invest in interest rate derivatives from applying duration netting rules under the commitment method, in accordance with paragraph (9) of Article 8 of the Commission Delegated Regulation (EU) No 231/2013.
Question 7 [Last update 29 March 2019]: How frequently should an AIFM calculate the leverage of each AIF that it manages?
Answer 7 [Last update 29 March 2019]: An AIFM should calculate the leverage of each AIF that it manages as often as is required to ensure that the AIF is capable of remaining in compliance with leverage limits at all times. Consequently, leverage should be calculated at least as often as the NAV is calculated, or more frequently if required. Circumstances which may lead to increased frequency of leverage calculation include material market movements, changes to portfolio composition and any other factors the AIFM believes require calculation of leverage more frequently than NAV in order for the AIF to remain in compliance with leverage limits at all times.
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