ESMA has issued an opinion on 1st October 2013 advising EU authorities to collect certain additional information in AIFMD Annex IV reports to assist them in monitoring systemic risk.
A challenge emanating from this it is that it is likely to impact upon, and create country variations as regards:
The scope of AIFs caught by Annex IV Reporting requirements;
The format of the Annex IV Reports required (if the additional information was required within the Annex IV Report, rather than separately).
The requests for additional information cover the following areas:
Information on the number of transactions
Information on geographical focus based on the domicile of investments made
Information on short positions
Information on risk measures
Information on non-EU master AIFs not marketed in the Union
A summary of ESMA requests for additional information is set-out, together with consideration of the potential impact. To understand how this has been implemented by individual Member States, please see the Funds-Axis AIFMD Country Portal.
ESMA believes that information on the total number of transactions carried out using a high frequency algorithmic trading technique, as defined in the revised Markets in Financial Instruments Directive (MiFID II), along with the corresponding market value of buys and sells in the base currency of the AIF over the reporting period, could be usefully collected by NCAs. ESMA is of the view that it would be appropriate for NCAs to require this information to be reported following the entry into force of MiFID II.
Funds-Axis Impact Assessment:
In the current AIFMD Annex IV 1.2 XML format, both number of transactions and market values of buys and sells can already be reported. This information is currently optional, and would not necessitate any change to the current XML format.
See the Funds-Axis AIFMD Country Portal for more information.
ESMA has stated it would see merit in NCAs’ requiring that information on the geographical focus also be expressed as a percentage of the total value of assets under management calculated in accordance with Articles 2 and 10 of the Regulation, so that the impact of financial derivative instruments is better taken into account.
Funds-Axis Impact Assessment:
In the AIFMD Annex IV 1.2 XML format, the calculations required are:
Market value / NAV
Absolute AUM / total AUM
As these calculations are already performed as part of the AIF report elsewhere, and as the information is already an optional field in the template, this is of minimal impact.
See the Funds-Axis AIFMD Country Portal for more information.
According to the reporting template set out in the Regulation, AIFMs shall specify the five most important instruments in which the AIF is trading and whether the positions are short or long. When AIFMs report short positions, ESMA would consider it desirable for NCAs to require that this information be supplemented by an indication of whether the position is used to hedge a position with a similar economic exposure. In that context, ESMA believes it would be appropriate for NCAs to require information on the extent of the hedging expressed as a percentage.
Funds-Axis Impact Assessment:
In the AIFMD Annex IV 1.2 XML formats, it is not mandatory to identify if the short position is a hedge against a position with a similar economic format.
In Funds-Axis’ opinion, this is not desirable. It is essential that Annex IV reports can be produced in a highly automated way. It could be a significant system challenge to identify against an individual asset whether it was used for hedging or not. It would also need to be clarified whether the fact that an instrument was a slight over-hedge would lead to the totality of position being classified as not a hedge.
The extent to which derivatives are used for hedging can be ascertained from the calculation of leverage using the commitment methodology.
See the Funds-Axis AIFMD Country Portal for more information.
Where relevant, according to the predominant AIF type of the AIF, ESMA would see merit in NCAs’ requiring information on the Value at Risk (VaR) of the AIFs to be reported, in particular, as regards AIFs pursuing hedge fund strategies.
Where an AIFM reports the VaR of the AIF, ESMA would consider it appropriate for NCAs to require the VaR to be computed as of the last business day of the reporting period with an interval of confidence of 99% over a period of 250 days and with a 20-day holding period using either a Monte Carlo simulation or Historical simulation or a Parametric VaR.
Moreover, ESMA believes that, where relevant according to the investment strategy of the AIF, further information such as the portfolio’s sensitivity to a change in FX rates or commodity prices would constitute useful information to be required by NCAs.
Funds-Axis Impact Assessment:
In the AIFMD Annex IV 1.2 XML format, VAR is an optional field.
Should NCAs require VAR and other risk measures to be reported on a mandatory basis, this would require a relatively small amend in the required XML format. It is also useful that ESMA has recommended the relevant variable (confidence level, look-back and holding levels).
However, it is important that the caveat is maintained of requiring information “where relevant, according to the predominant AIF type of the AIF ….”.
For example, the UK does not require VAR Reporting “where relevant”, but instead requires it where the Value at Risk (VaR) is calculated for any other purpose (i.e. optional) (FUND 3.4.6A(1)).
For more details, see the Funds-Axis AIFMD Annex IV – Country Comparison Portal.
Reporting obligations under Article 24(2) of the AIFMD cover only EU AIFs or AIFs marketed in the Union. This means that AIFMs are not required to report information under Article 24(2) of the AIFMD for non-EU AIFs that are not marketed in the Union.
However, in order to have a comprehensive set of information for a proper assessment of systemic risk, ESMA considers it desirable for NCAs to require AIFMs that manage non-EU master AIFs that are not marketed in the Union to report, in addition to the information under Article 24(1), for these AIFs the information requested by Article 24(2) of the AIFMD in so far as one of the feeder AIFs of these master AIFs is an EU AIF or is marketed in the Union. However, ESMA does not consider it useful for NCAs to require this information to be provided if the non-EU master AIFs and the feeder AIFs mentioned above do not have the same AIFM.
Funds-Axis Impact Assessment:
The scope of this is wide. For example, reporting on the Master would be required for:
A US manager with a Cayman master AIF and an Irish feeder AIF,
A US manager with a Cayman master AIF and a Cayman feeder AIF marketed in the EEA.
The ESMA Opinion has been followed in a number of EEA member states such as Belgium, Ireland and Luxembourg.
See the Funds-Axis AIFMD Country Portal for more information.
Whilst ESMA’s Opinion seems to apply to all non-EEA Master AIFs where there is a feeder being marketed in the EEA, some Member States have applied the rule to only apply where the AIFM is above threshold. This approach seems justified and appropriate given that ESMA’s stated purpose is to enable “proper assessment of systemic risk.” This is the approach that has been taken in the UK.
