On March 29th 2019 ESMA released an updated version of Questions and Answers on the Application of Alternative Investment Fund Managers Directive. It includes two new questions in section VIII on the leverage calculation.
The first question provides clarity on treatment of short-term interest rate futures for the purpose of leverage exposure calculations. According to ESMA, calculation of leverage exposure of an AIF resulting from a short-term interest rate future should not be adjusted for the duration of the future. Paragraph 1(a) of Annex II of the Commission Delegated Regulation (EU) No. 231/2013 (“Delegated Regulation”) sets out the method to be applied as the product of the number of contracts and the notional contract size regardless of the duration of the financial instrument. Nevertheless, it does not preclude an AIFM form applying duration netting rules under the commitment method, in accordance with paragraph (9) of Article 8 of the Delegated Regulation for the AIFs which primarily invest in interest rate derivatives.
The second question relates to the required frequency of leverage calculation conducted by the AIFM for each AIF it manages. In that respect, ESMA takes the view that leverage should be calculated at least as often as the net asset value or more frequently if it is required for the AIF to comply with its leverage limits. ESMA further provides that the circumstances which may lead to increased frequency of leverage calculation include material market movements and changes to portfolio composition or any other factors subject to the assessment of the AIFM.
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