EU fund regulations should form the basis for how asset managers use leverage and measure risk, three trade bodies have said in response to concerns about systemic risk in the funds industry.
The three bodies, which include the European Fund and Asset Management Association (Efama), said the fund regime in the EU was “cutting edge” and effective as it allowed European regulators to assess levels of leverage and take appropriate supervisory actions.
Efama, along with the International Capital Market Association and the Asset Management and Investors Council, published the report on leverage in response to Financial Stability Board concerns about the possibility of systemic risk emanating from the funds industry.
A matrix of different measures contained within EU directives for retail and alternative funds would illustrate meaningfully exposures, according to the report which also said that leverage levels have remained constant in EU-domiciled funds and there had been no systemic risk related to the use of leverage.
It also recommends improved data sharing between funds, which would allow identification and monitoring of risks for macro-prudential policy reasons and says there are merits in streamlining reporting requirements at the EU level.
Peter de Proft, Efama director general, said: “We firmly believe European regulation is a cutting-edge framework at the global level, and hope that IOSCO [International Organization of Securities Commissions] and FSB regulators use it as the benchmark and starting point for their work. This will allow them to deliver their mandate and propose a consistent matrix of different measures that can capture the broad universe of fund vehicles and investment strategies”.
The report also examines as counterparty and market risks, although these risks are not directly associated with leverage, said Efama.
The funds industry has fought to prevent investment funds being viewed as a threat to financial stability. As well as the issue of leverage, the FSB has also highlighted a mismatch in liquidity concerning redemptions in open-ended funds as another risk, which the Investment Company Institute described as “flawed”.
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