IOSCO launches framework for monitoring leverage in funds that may pose stability risks

The Board of the International Organization of Securities Commissions (IOSCO) today unveiled a two-step framework designed to facilitate monitoring of leverage in investment funds that could potentially pose risks to financial stability.

The framework, outlined in the report on Recommendations for a Framework Assessing Leverage in Investment Funds, comprises a two-step process aimed at achieving a meaningful and consistent assessment of leverage-related risks of a fund or group of funds. The recommendations aim to achieve a balance between precise leverage measures and simple, robust metrics that regulators can apply consistently to the wide range of funds offered in different jurisdictions.

IOSCO recommends that regulators use this leverage framework as a basis for their assessment of leverage-related risks in funds.  Step 1 indicates how regulators could exclude from consideration funds that are unlikely to produce financial stability risks while identifying a subset of funds for further analysis that may pose such risks. Step 2 entails a risk-based analysis of the subset of funds identified in Step 1.

For Step 1, IOSCO recommends that regulators use Gross Notional Exposure (GNE) or adjusted GNE as baseline analytical tools. By collecting information on long and short exposure, on an asset class basis, the regulatory community will gain greater insight on the direction of leverage.

For Step 2, IOSCO recommends that each regulator determine its approach to define appropriate risk-based measures for analyzing funds identified under Step 1 that may potentially pose significant leverage-related risks to the financial system.

Ashley Alder, Chair of the IOSCO Board, said: “IOSCO has developed the first comprehensive approach to monitoring leverage across all types of investment funds globally.  It provides a framework to help regulators assess leverage-related risks that can undermine the efficient functioning of markets.”

Based on the available data, IOSCO will publish an annual report reflecting leverage trends within the asset management industry at a global level. The first report is scheduled to be published in 2021. IOSCO intends to gradually expand subsequent reports to include more jurisdictions.

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