ESMA Consults On Leverage Risk In The AIF Sector

In response to recommendations which were issued by the European Systemic Risk Board (the "ESRB") in April 2018 to address liquidity and leverage risk in investment funds, ESMA has launched a public consultation on its draft guidelines pursuant to Article 25 of the Alternative Investment Fund Managers Directive ("AIFMD") (the "CP"). The aim of the guidelines is to harmonise approaches to leverage within alternative investment funds ("AIFs") across the EU by imposing greater consistency on how national competent authorities ("NCAs") (a) assess the systemic risk of the use of leverage; and (b) set limits on the amount of leverage an AIF can employ. Accordingly, the outcome of the consultation could have a significant impact on alternative investment fund managers ("AIFMs") and will be of interest to the board of directors of AIFMs and AIFs, with the CP suggesting NCAs could impose leverage limits on certain categories of AIFs that pose a risk to financial stability.