The European Securities and Markets Authority ("ESMA") publishes today a consultation paper (ESMA/2011/209) setting out its proposals for the detailed rules underlying the Alternative Investment Fund Managers Directive (AIFMD). This is in response to the request for assistance which the European Commission sent to ESMA’s predecessor, CESR, in December 2010. ESMA has to deliver its final advice to the Commission by 16 November 2011.
Steven Maijoor, Chair of ESMA, said:
“Delivery of the advice to the Commission on the AIFMD is one of ESMA’s top priorities for 2011 and today’s publication is a crucial step in achieving that objective. Indeed when finalised, these rules will increase transparency for investors and supervisors, and will significantly contribute to tackling the potential build-up of systemic risk. Input from all stakeholders to this consultation will be particularly vital for ESMA in shaping the final rules that will govern the European alternative investment fund industry.”
The proposals published in ESMA’s consultation paper (CP) today cover three broad areas:
1. General provision for managers, authorisation and operating conditions
As well as clarifying certain issues regarding the thresholds that determine whether a manager is subject to the Directive, this section includes such topics as valuation and delegation. On the issue of valuation, ESMA sets out draft advice on criteria for the proper valuation of assets by identifying general principles that should guide managers in developing and implementing policies and procedures for a proper and independent valuation of the assets of an alternative investment fund (AIF). As these are general principles, they can be adapted to the types of asset in which an AIF may invest.
As far as delegation is concerned, ESMA has been asked to identify the criteria for objective reasons justifying a delegation. Here the proposals set out two options for consultation: the first takes a flexible approach according to which a delegation can be justified where the manager can demonstrate that the delegation is done for the purposes of a more efficient conduct of the management of the fund; while the second option sets out an indicative, non-exhaustive list of criteria to be used when making the assessment.
2. Governance of AIFs’ depositaries
This part of the advice sets out ESMA’s proposals on the framework governing depositaries of AIFs. In addition to the advice on the content of the written contract evidencing the appointment of the depositary and the clarification on the depositary’s oversight duties, ESMA makes proposals on the key issue of depositary liability. The first element of this relates to the circumstances in which a financial instrument held in custody should be considered as ‘lost’; this assessment is crucial in determining whether a depositary must subsequently return an asset. ESMA’s proposals identify three conditions, at least one of which
would have to be fulfilled in order for an asset to be considered lost. Another important concept which ESMA’s advice aims to clarify relates to which events would constitute external events beyond the reasonable control of the depositary. Finally, the advice considers options for the objective reasons that would allow a depositary to contractually discharge its liability, such as legal constraints that give the depositary no choice but to delegate its custody duties to a third party.
3. Transparency requirements and leverage
One of the key objectives of the AIFMD is to help prevent the build-up of systemic risk. With this aim in mind, ESMA’s proposals cover several issues related to leverage e.g. the definition of leverage, how it should be calculated and in what circumstances a competent authority should be able to impose limits on the leverage a particular manager may employ. Given the wide range of funds covered by the Directive and the diverse nature of the assets in which such funds invest, ESMA considers it appropriate to prescribe two different calculation methodologies for the leverage (commitment and gross methods) as well as a further option that can be used by managers on request and subject to certain criteria.
The AIFMD also aims to increase transparency of alternative investment funds and managers. In this context, ESMA’s advice specifies the form and content of information to be reported to competent authorities and to investors. The advice also addresses the content and format of the annual report to be prepared for each fund. In this regard, ESMA’s approach has been to recognise the existence of national and international accounting standards already in place and to develop a compatible framework.
Next steps
Stakeholders have two months in which to give their feedback to ESMA. In light of the feedback received from respondents by the deadline of 13 September, ESMA will finalise its advice to the Commission in time for submission by 16 November.
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