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Regulation

EU rules already mitigate leverage risk in investment funds, new paper says

The risks stemming from the use of leverage in investments funds could be mitigated through European Union legislative frameworks, said a paper published jointly Wednesday by European Fund and Asset Management Association, International Capital Market Association's and Asset Management and Investors Council.

In January, Financial Stability Board and the International Organization of Securities Commissions voiced a concern that the systemic leverage risk was growing. The industry position paper said fund managers, as opposed to banks,might already be protected from it as "the EU framework offers the risk management and reporting requirements that regulators, fund managers and investors need" through rules under the UCITS Directive and Alternative Investment Fund Managers Directive and other rules under European Market Infrastructure Regulation.

Peter de Proft, EFAMA's director general said in a news release: "Existing EU regulatory framework is regulating in a consistent way the use of leverage in investment funds, along with key related topics, such as the mandatory disclosures to investors, the reporting requirements to the regulators and the monitoring of leverage by regulators for systemic risk purposes."

However, EFAMA, ICMA and AMIC argued that monitoring and analysis of leverage risk could be improved. According to these organizations the existing regulatory standards at the EU level can be the basis for developing global standards.

"This would allow a meaningful representation of a fund's exposures, given that there is no single measure that can capture all the risks in nature, size and characteristics associated with a fund's underlying assets and strategies," EFAMA said in the news release.

The three organizations proposed streamlining global calculation methodologies for leverage and risk and data sharing among regulators of already reported data

The paper is available on EFAMA's website.