CP12/32: Implementation of the Alternative ... - BVCA admin

CP12/32
Implementation of the Alternative Investment Fund Managers Directive
Leverage
Annex X
8.18 The Directive introduces significant new regulation regarding the use of leverage by AIFMs
and the calculation of the exposure of AIFs under management. It also requires the
Commission to adopt subordinate measures specifying the methods by which AIFMs will
calculate leverage used by their managed AIFs, including any financial and/or legal structures
involving third parties controlled by the relevant AIF. 101 However, the Directive excludes
leverage at the level of a portfolio company for private equity and venture capital funds. 102
Transposition of the Directive’s requirements on leverage
8.19 The leverage definition in the Directive 103 will be transposed into the Glossary of the
Handbook. We expect the final Level 2 Regulation to specify more detailed requirements
on how leverage is to be calculated. These will not be reproduced in the Handbook.
8.20 The Level 2 Regulation will require firms to use two methods to calculate the leverage of
an AIF portfolio. The ‘Gross’ method is the sum of the absolute values of all positions.
Along with other requirements, the Gross method requires derivative instruments to be
converted into the equivalent position in their underlying assets. Whereas the Gross method
may substantially increase the exposures of certain funds, such as those using foreign
exchange or interest rate derivatives, by contrast the Commitment method allows certain
prescribed netting and hedging relationships to be taken into account. The resulting
calculations of the two methods should reveal an AIF’s investment strategy and its exposure
in ways that are relevant for investors and supervisors.
Using leverage data
8.21 AIFMs will use the data resulting from the two methods of leverage calculation in a
number of situations contemplated by the Directive.
8.22 In relation to transparency requirements:
• to disclose to us the leverage amounts as part of AIF reporting 104 ; and
• to disclose to investors the total amount of leverage and any changes to the maximum
level of leverage employed by an AIF. 105
8.23 In relation to risk management requirements:
• to set a maximum level of leverage for each AIF that they manage 106 ;
101 Article 4(3)(a) and (b) AIFMD.
102 Recital 78 AIFMD.
103 Article 4(1)(v) AIFMD.
104 FUND 3.4.6R.
105 FUND 3.2.6R.
106 FUND 3.7.7.R (1).
66 Financial Services Authority November 2012