Given the acknowledgement at AIFMD Regulation Recital (11) that “… best results can be achieved by combining the so-called ’gross’ and ’commitment’ methods,” we would urge ESMA to remove the requirement for UCITS to disclose Notional Leverage from derivatives to investors. Notional Leverage is an entirely unhelpful and misleading calculation of leverage.

To improve the consistency and clarity of investor and regulatory disclosures, it should be confirmed that (i) there is no intended difference between the UCITS Global Exposure calculated using the Commitment Approach and AIFMD Commitment Exposure; and (ii) both AIFMD Commitment Exposure and UCITS Global Exposure should be consistently quoted having regard to the total exposure of the portfolio / NAV.

This will entail no change for AIFMD, but will require the following amendments and clarification to UCITS Global Exposure:

o Consistent with AIFMD Commitment Exposure, the UCITS Global Exposure should be expressed as the ratio between the exposure of an AIF and its net asset value. Currently, for a Portfolio AIF with 100 equity investment and a further 200 derivative, being 300 total exposure, and a NAV is 100, then it would have 3 times leverage, at 300%. UCITS Global Exposure in contrast would be 200%.

o Clarification should be provided that, as with AIFMD Commitment Exposure, leverage obtained from the reinvestment of borrowing should also be taken into account for UCITS Global Exposure; As a related point it should also be confirmed whether the leverage from reinvestment contributes towards the 100% incremental exposure limit or whether that the limit increases to 110%, having regard to the UCITS 10% temporary borrowing limit.

o AIFMD Commitment Exposure provides that derivative exposure can be reduced to the extent that it is backed by cash and “cash equivalents.” UCITS Global Exposure provides similarly but refers to “Risk Free Assets.” It should be confirmed that there is no intended difference between these terms, noting that:
    o AIFMD cash equivalents specifies that the cash equivalents must be in the base currency of the portfolio
    o AIFMD specifies that this reduction in exposure is only possible in the case of long derivatives.

It should be clarified that share class hedging FX should not be taken into account for any of the calculations.

The treatment of cash and cash equivalent for (i) AIFMD Commitment Exposure and for (ii) UCITS Global Exposure Risk Free Assets should be made consistent with one another and with the treatment under AIFMD Gross exposure, where it is excluded from the calculation. Alternatively, if the difference is to be maintained, then It should be clarified that, for AIFMD Commitment Exposure and UCITS Global Exposure, the exposure from direct investments into equities and bonds can also be reduced to the extent that it is covered by risk free assets. This would be helpful to avoid the unhelpful scenario outlined at Examples 6 and 7 of this document in respect of deleverage.

The treatment of convertible bonds for the UCITS Global Exposure calculation should be clarified. See Example 8 in this document.