Recommendations for a framework assessing leverage in investment funds
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Recommendation 1 IOSCO recommends that regulators use the following two-step analysis in assessing and monitoring leverage (“the Leverage Framework"). Step 1 uses measures of leverage to identify and analyse funds that may pose a risk to financial stability (see Recommendation 2). Step 2 involves further analysis of this sub-set of funds (see Recommendation 3). The goal of Step 1 is to provide regulators with a means of efficiently identifying those funds that are more likely to pose risks to the financial system using at least one notional exposure metric as further specified under Chapter Two of the Report. Step 1 provides an approach to how regulators using exposure metrics in various contexts and situations to filter and select a subset of investment funds for further analysis. Step 2 involves a risk-based analysis on the subset of funds identified in Step 1.
Recommendation 2 IOSCO recommends that regulators collect Gross National Exposure (GNE) or adjusted GNE broken down by asset classes, and long and short exposures. Regulators can at their discretion complement the GNE or adjusted GNE analysis with net exposure measures using either a rules-based or analytical-based netting and hedging approach. In their assessment of leverage in funds, which may pose significant leverage-related risks to the financial system, regulators may take action, when and to the extent they deem appropriate.
Recommendation 3 IOSCO recommends that in applying Step 2 of the Leverage Framework each regulator determines its own approach to defining appropriate risk-based measures to further analysing funds identified under Step 1, that may potentially pose significant leverage-related risks to the financial system. In conducting their Step 2 analysis, taking into account the fund’s characteristics and potential market risk, counterparty risk, or liquidity risks, as appropriate, regulators may consider using the leverage-related risk measures that are common across jurisdictions, as further detailed for illustration purposes and in a non-exhaustive manner in Appendix C of the Report.
Recommendation 4 IOSCO recommends that jurisdictions that do not already make the following leverage data publicly available do so, or provide this information to IOSCO for publication on a yearly basis:
GNE or adjusted GNE aggregated by asset class, including long and short exposures for funds assessed under Step 1;
Criteria of exclusion used to scope-out funds from Step 1 along with the aggregate amount of assets under management of funds not in scope in proportion to the total assets under management within their jurisdiction