IOSCO Provides Framework to Assess Leverage in Investment Funds
IOSCO published a report outlining recommendations with respect to a framework for monitoring leverage in investment funds that may pose financial stability risks. The report presents a two-step framework: Step 1 indicates how regulators could exclude from consideration funds that are unlikely to produce financial stability risks while identifying a subset of funds for further analysis that may pose such risks; Step 2 entails a risk-based analysis of the subset of funds identified in Step 1. IOSCO shall, based on the data available to it, publish an annual report reflecting leverage trends in the global asset management industry. The first report is scheduled to be published in 2021, though IOSCO intends to gradually expand subsequent reports to include more jurisdictions.
For the first step, IOSCO recommends that regulators use Gross Notional Exposure or adjusted Gross Notional Exposure as baseline analytical tools. By collecting information on long and short exposures, on an asset class basis, the regulatory community will gain greater insight on the direction of leverage. For the second step, IOSCO recommends that each regulator determine its approach to define appropriate risk-based measures for analyzing funds identified under the first step that may potentially pose significant leverage related risks to the financial system. The recommendations aim to achieve a balance between precise leverage measures and simple, robust metrics that regulators can apply consistently to the wide range of funds offered in different jurisdictions.
The two-step leverage framework provides a holistic approach to capture significant leverage-related risks of a fund (or group of funds) to give regulators the tools to assess these risks for financial stability purposes. The framework embeds proportionality, by acknowledging that not all funds need to be captured for financial stability monitoring purposes, given the immense diversity in funds’ structures, types, and strategies as well as domestic legal and regulatory frameworks governing these investment vehicles. Some funds, for example, are prohibited from using leverage. More generally, under this leverage framework, funds that do not pose systemic risks due to their leverage would be excluded, such as funds capped in terms of leverage and/or limited in size.
Related Links
Keywords: International, Banking, Securities, Leveraged Lending, Financial Stability, Investment Funds, IOSCO
Related Articles
BCBS Amends Guidelines on Sound Management of AML/CFT Risks
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).
US Agencies Finalize Amendments to Swap Margin Rule
US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.
PRA Letter Sets Expectations on Approach to Managing Climate Risks
PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.
EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR
EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).
FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform
FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.
IAIS Publishes List of Internationally Active Insurance Groups
IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.
FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act
FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).
EC Launches Consultation on Review of Solvency II Directive
EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.
ECB Consults on Supervisory Approach to Consolidation in Banking
ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.
IAIS on Package for 2020 Data Collection on ICS and Aggregation Method
IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.
