AIFMD and ESMA Quarter One Update

ESMA concerned with liquidity mismatch for retail investors

ESMA has noted that the two fund types with the largest percentage of retail investors (Funds of Funds and Real Estate Funds) are also the fund types with the largest liquidity mismatch.

Steven Maijoor, ESMA Chair, said: “A detailed analysis of the liquidity risks of AIFs has highlighted that especially the categories with the highest percentage of retail investors are vulnerable to these risks. This should be considered by investors when making their investment decisions. These data will also support National Competent Authorities in their supervision of AIFs, and further strengthens supervisory convergence throughout the EU.”

ESMA specifies how closed-ended unleveraged AIFs should respond to liquidity stress test question

In its latest AIFMD FAQs, ESMA confirmed that closed-ended unleveraged AIFs do not need to report liquidity stress test results. As that is a mandatory field, ESMA specified that AIFs should “indicate the question is Not Applicable and at least report in this field the fact that the relevant fund is a closed-ended unleveraged AIF. However, where an AIFM decides to conduct liquidity stress tests for unleveraged closed-ended AIFs, it should report the results of the liquidity stress tests in the same field.”

ESMA notices growth of Leveraged Loans and CLOs

In its annual statistical report ESMA dedicated a three-page section to the surging leveraged loan and CLO markets, noting that exposures to those asset classes has increased by 15% since the end of 2018.

ESMA said, “Higher indebtedness of borrowers and looser underwriting standards amid compressed spreads have raised concerns among policymakers, especially given data gaps on ultimate investors into those markets.”

“…The increase in exposures comes from AIFs with no previous exposures to the leveraged loan market. Indeed, AIFs that had already invested in CLOs and leveraged loans in 2017 kept their exposures stable (EUR 74bn in 2018 compared with EUR 72bn in 2017).

“…pension funds and insurance companies are the most exposed to leveraged loans and CLOs through their investment in AIFs, with overall exposures of EUR 33bn and EUR 19bn respectively. Insurance companies are the most exposed to CLOs at around EUR 7bn. These exposures are more than two times higher than direct exposures to CLOs reported by EU insurance companies, which amounted to EUR 3bn at the end of 2018 according to EIOPA (2019).”