The Q&A document, which offers responses to questions from the general public and national regulators regarding the practical application of the directive, was updated by ESMA in July and again at the end of September. Although primarily designed to ensure that regulators’ supervisory policies are in line with ESMA’s guidance, the answers also aim to provide alternative fund managers with clarity about the AIFMD rules. They do not constitute fresh requirements.
The Q&A now deals with seven topics: remuneration, notification of alternative investment funds, reporting to national regulators, notification of alternative fund managers, MiFID services under the AIFMD, depositaries, and calculation of leverage.
As regards reporting to national regulators, ESMA’s new answers deal with issues including reporting of derivative trade volumes, repo trades, FX spot trades, cross-currency interest rate swaps, the assessment of “substantial” leverage, rehypothecation of collateral, and the currency denomination for reporting on principal markets and financial instruments in which they trade.
The latest additions to the document clarify a number of points relating to regulatory reporting:
• Non-EU managers marketing funds in Europe must continue to report to EU regulators after the marketing period has ended, as long as they still have investors from those jurisdictions.
• Frequency of reporting to national regulators for alternative managers is calculated according to all funds managed or marketed in the EU, not the funds marketed in a particular member state.
• Managers should use the total value of assets under management calculated according to Article 2 of the implementing regulation, rather than NAV, in reporting information under questions 48 and 86 to 93 of the consolidated reporting template.
• The value of the five main instruments traded by the fund should be calculated according to Article 2 of the implementing regulation and not Article 3 of the AIFMD.
• If a fund’s final NAV is not available by the regulatory reporting deadline of 30 or 45 days after the end of the reporting period, managers should use estimates of the fund’s NAV and send updates afterwards if the final NAV is different.
• The position type of a derivative instrument (long or short) should be determined by reference to the exposure to the derivative’s underlying – so a long position on a put option should be reported as short, and a short position on a put option as long.
• Managers should adopt a conservative approach in reporting information on portfolio liquidity and take into account any delay in receiving the proceeds of a sale on a cash account if it has a non-negligible impact on the fund’s liquidity profile.
• Managers should include all existing cash accounts when reporting on the total number of open positions; they should use market value when reporting on the value of securities borrowed for short positions; they should report information on turnover of financial derivatives based on both market and notional values; and they should treat bank overdrafts as short positions under ‘cash and cash equivalent’ when reporting on individual exposures.
In the area of depositary requirements, the clarifications cover cash monitoring and reconciliation obligations, verification of compliance by the fund and manager with anti-money laundering, employment law and non-management related contractual obligations, verification of ownership of derivatives, custody requirements regarding interests in other funds, and the definition of the close of the business day.
Regarding calculation of leverage, ESMA has clarified that debt raised by financial structures controlled by private equity funds for the acquisition of assets should be included in the calculation of leverage where the structure is specifically set up for that purpose. However, it should not be included in cases where the fund does not have to bear losses beyond its investment in the structure, nor should debt raised by unlisted companies or issuers subject to the same proviso, even where the debt is raised to pay a dividend enabling the financial structure to repay its acquisition debt.
In a new section on delegation, ESMA says that when assessing whether delegation of portfolio management and/or risk management by the alternative fund manager results in the AIFM becoming a letterbox entity under Article 20 of the directive, the assessment should be made at the level of each individual fund, rather than the manager.