On February 1, MFA, AIMA and the Alternative Credit Council (ACC) submitted a letter on IOSCO’s consultation paper on the use of leverage by investment funds in which IOSCO proposed a two-step approach for regulators.
In the letter, among other points, the Associations’ main positions are to:
- express strong support for the consultation paper’s recommendation that step one leverage metrics for a fund be assessed on an asset class basis, rather than as a single aggregate number across heterogenous asset types;
- underscore concerns with regulators’ potential use of unadjusted gross notional exposure (GNE) as a misleading measurement of the amount of leverage or risk of a fund’s investment positions;
- generally support an adjusted GNE metric and/or a net notional exposure (NNE) metric that include appropriate netting or hedging arrangements;
- encourage IOSCO to recommend the SEC’s Form PF approach for reporting a fund’s long and short positions by not requiring asset managers to report positions that are closed out with the same counterparty and result in no credit or market exposure for the fund; if IOSCO disagrees, encourage IOSCO to recommend that long and short positions be reported separately, at least with respect to long and short positions that do not create credit or market exposure;
- encourage regulators to consider supplementary data points in combination with step one leverage metrics to develop a more comprehensive assessment;
- stress the importance of regulators’ distinguishing “investment risk” from “systemic risk” that arises from the use of leverage, such that regulators retain the discretion to determine that no step two assessment is required following step one;
- recommend that IOSCO establish the principle of a “Primary Designated Regulator” based on where an asset manager’s primary place of business is to help alleviate duplicative and/or contradictory approaches across multiple jurisdictions and;
- request that IOSCO’s consultation report clarify that leverage metrics should be used to consider whether a fund’s leverage might increase risk to the financial system as a whole, rather than conflating systemic risk with firm-level market or other idiosyncratic risks in a portfolio.