ESMA on AIFMD review: Encouraging Commission to support areas identified to improve the AIFMD
24/09/20
In Brief
On 18 August, 2020, the European Securities and Markets Authority (“ESMA”), the EU’s securities markets regulator, issued a letter to the European Commission (“Commission”), highlighting areas to consider during the forthcoming review of the Alternative Investment Fund Managers Directive (“AIFMD”).
AIFMD has provided a successful framework for alternative funds in Europe since 2011. However, through the years, ESMA and national competent authorities have gained experience of the framework and have identified areas that could be improved in the legislation to enhance the supervision of alternative fund managers in Europe. ESMA has also learned from its role in the reporting framework under AIFMD where improvements could be made.
ESMA's letter includes recommendations for changes in 19 areas including, harmonising the AIFMD and UCITS regimes, delegation and substance, liquidity-management tools, leverage, the AIFMD reporting regime and data use, and the harmonisation of supervision of cross-border entities.
The review of AIFMD provides the EU with an opportunity to apply the lessons learned. Policy enhancements are proposed in Annex I to the letter and reporting recommendations are made in Annex II. Many of the recommendations made also require consideration of changes to the UCITS legislative framework.
ESMA encourages the Commission to support the areas identified in the letter in order to improve the effectiveness and soundness of the AIFMD1.
1. https://www.esma.europa.eu/press-news/esma-news/esma-recommends-priority-topics-in-aifmd-review
ESMA’s proposed changes to AIFMD regarding the reporting regime and data use
Obligation to acquire a LEI for the manager and its funds
In the current situation, AIFMD regulations do not require that AIFMs and AIFs acquire, or communicate, the Legal Entity Identifier (LEI). ESMA recommends requiring that all AIFMs acquire and report LEI for themselves and their AIFs.
Detailed information on the composition of assets and liabilities of the fund
Current reporting on AIFs only provides information on the main instruments and categories of assets and liabilities, limiting the possible use of the provided data to monitor, benchmark and compare the funds.
ESMA considers that information provided should be comprehensive regarding assets and liabilities in order to allow comparison with the aggregated figures on AuM and NAV. to identify potential systemic risks, an identification of the counterparties should be provided (at least for FSB entities). The data reported should be easily accessible with minimal treatment by using internal extraction and should favour strong international standards (e.g. LEI, ISIN, MIC, CFI...). Key information provided by the AIFMs to investors should be disclosed as well in the report to the national competent authorities (“NCA”).
Information on liabilities should be more detailed providing the breakdown (cash, deposits, loans) as well as the characteristics of shares, maturity and liquidity profiles as well as other arrangements. The information on the valuation of assets should consider the impact on AuM, NAV and leverage metrics.
Definition of leveraged fund
The current definition of leverage fund is unclear and creates barriers for authorities and AIFM, who have difficulties to demonstrate to NCAs that they are compliant with their national notion of leverage fund.
ESMA suggests a new definition for leverage fund that encompasses an AIF whose exposure is increased by the AIFM through borrowing of cash or securities or leveraged by derivatives.
Scope of entities in ESMA register
The scope of AIFMs does not include sub-threshold AFIMs (Art. 3) or NPPRs (Art. 42) or non-EU AIFs managed by a non-EU AIFMS (Art. 40).
ESMA advocates the addition of all above-mentioned AIFMs in the ESMA public register.
Timeline for NCAs to update ESMA register
As for now, updates of the ESMA register are provided on a quarterly basis.This makes them sometimes dated for investors and market participants, given that recent changes, such as on authorisation or withdrawals, might not have been communicated in time. ESMA supports an increase of the reporting frequency to once a month.
Reporting in percentages
Reporting figures only in percentages can lead to quality issues. ESMA supports the use of numerical monetary values instead of percentages with a potential exception for monthly performance figures.
Restrictions in the use and publication of the reported data
Article 47 of the AIFMD says that any information exchanged between NCAs and ESMA cannot be disclosed unless the disclosure is required for legal proceedings or the NCA consents to disclose. Providing no legal safety regarding the possible share of anonymised AIFMD data, ESMA asks for an alignment with their internal regulation, accepting the use, distribution and publication of the data in summary or aggregated form.
Reporting exemptions for Private Equity funds
Private Equity funds (“PE funds”) do not have to report leverage at the level of the structure they invest in. It implies that gross exposures and NAV are only based on the equity approach and not on the consolidated approach. As a result, the actual leverage is under-reported.
ESMA recommends removing the reference in the recital 78 mentioning that PE funds do not have to report leverage at the level of a Special Purpose Vehicle (“SPV”).
Requirement to report ESG metrics
The current implementation of AIFMD does not contain any fields related to the Environmental, Social and Governance (“ESG”) aspects of the investments. ESMA would like to see the addition of ESG factors to the AIFMD reporting in order to monitor the ESG risks.
TODAY - ESMA’s involvement
Recently, ESMA has implemented validity checks with the NCAs to enhance transparency and accuracy of AIFMD reporting with other local reporting. Clients have received an error message and a request to amend their reporting. Accordingly further ESMA checks are supposed to follow.
STAY TUNED
Our AIFMD Team offers their support to guide you through upcoming changes, reporting preparation and review or any other related questions you might have. Please do not hesitate to contact us via AIFMD-Reporting@lu.pwc.com.
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