Calculation of leverage - ESMA updates Q&As on the AIFMD

On 29 March 2019, the European Securities and Markets Authority (ESMA) updated its Q&As, "Application of the AIFMD" to include two new Q&As, which provide guidance on how, and how frequently, an AIF’s leverage should be calculated.

On 29 March 2019, ESMA added two new questions to Section VII (Calculation of leverage) of its Q&As on the application of the AIFMD. These provide clarificatory guidance on two issues related to leverage:

  • how short-term interest rate futures should be treated when calculating leverage exposure under the AIFMD, and
  • how frequently the AIFM of an EU AIF which employs leverage should calculate this.

Calculating leverage exposure under a short-term interest rate future

New Q.6 confirms that when calculating an AIF’s leverage exposure resulting from a short-term interest rate future, an AIFM should not adjust this for the duration of the future.

When converting interest rate futures into equivalent positions in the underlying asset in order to calculate an AIF’s exposure, an AIFM should follow the method set out in para 1(a) of Annex II of the Commission Delegated Regulation (ie number of contracts x notional contract size). The duration of the financial instrument should not be considered as part of that calculation.

ESMA notes that this does not, though, preclude an AIFM which manages an AIF that primarily invests in interest rate derivatives as part of its core investment policy from applying the duration netting rules under the commitment method – see Article 8(9) of the Commission Delegated Regulation.

Frequency of leverage calculation

New Q.7 confirms that an AIFM should calculate the leverage of each AIF it manages “as often as is required to ensure that the AIF is capable of remaining in compliance with leverage limits at all times”.

ESMA’s view is that this means the AIF’s leverage should be calculated at least as often as the NAV is calculated - or, if required, more frequently.

ESMA also notes that calculating leverage more frequently than NAV may be required in the case of:

  • material market movements
  • changes to portfolio composition, or
  • any other factors which the AIFM believes justify leverage to be calculated more frequently than NAV in order for the AIF to remain in compliance with leverage limits at all times.

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