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.
Keywords: International, Banking, Securities, Leveraged Lending, Financial Stability, Investment Funds, IOSCO
Previous ArticleCBIRC and IMF Sign MoU on Technical Cooperation in Financial Sector
EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).
APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.
The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).
Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.
EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).
Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA
ESMA published the final guidelines on outsourcing to cloud service providers.
EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.
OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.
MAS updated rules for new housing loans by banks and finance companies.