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19 January 2011

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EFAMA’S REPLY TO CESR’S CALL FOR EVIDENCE ON IMPLEMENTING MEASURES ON THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE

Contents Introduction ...................................................................................................................................................... 3

General Remarks ............................................................................................................................................... 3

Prioritisation and Sequencing of Advice ................................................................................................... 3

Technical Standards and Guidelines (Level 3 Measures) .......................................................................... 4

Alignment with existing legislative framework (UCITS and MiFID) .......................................................... 4

Questions for the Call for Evidence .................................................................................................................. 5

Question 1 for the call for evidence ............................................................................................................. 5



Provisional Request to CESR for Technical Advice on Possible Level 2 Measures concerning the Future Directive on Alternative Investment Fund Mangers ......................................................................................... 6

II. Part I: General provisions, authorisation and operating conditions ..................................................... 6

II.1. Issue 1 – Article 3 Exemptions ...................................................................................................... 6

Issue 1 a) – Opt‐in procedure for AIFM below the threshold ................................................................... 6

Issue 1 b) – Thresholds – calculation, oscillation, obligations below thresholds ..................................... 6

II.2. Issue 2 – Article 9 Initial capital and own funds ................................................................................. 8

II.3. Issue 3 ‐ Article 12 General principles ................................................................................................ 9

II.4. Issue 4 ‐ Article 14 Conflicts of interest ........................................................................................... 10

II.5. Issue 5 – Article 15 Risk management ............................................................................................. 10

II.6. Issue 6 ‐ Article 16 Liquidity management ....................................................................................... 13

II.7. Issue 7 ‐ Article 17 and Article 61 (new Article 50a in UCITS) Investment in securitisation positions .................................................................................................................................................. 15

II.8. Issue 8 – Section 2 Organisational requirements, Article 18 General principles ........................ 16

II.9. Issue 9 ‐ Article 19 Valuation ........................................................................................................... 17

II.10. Issue 10 – Article 20 Delegation of AIFM functions ....................................................................... 18

III. Part II: Depositary (Article 21) ................................................................................................................ 22

III.1. Issue 11 – Contract evidencing appointment of the depositary ..................................................... 22

III.2. Issue 12 ‐ General criteria for assessing equivalence of the effective prudential regulation and supervision of third countries .......................................................................................................... 22

2 EFAMA’S reply to CESR’S call for evidence on implementing measures on the AIFMD

III.3. Issue 13 – Depositary functions ...................................................................................................... 23

ISSUE 13.1 – DEPOSITARY FUNCTIONS PURSUANT TO PARAGRAPH 6 ................................................... 23



III.4. Issue 14 – Due diligence .................................................................................................................. 26

III.5. Issue 15 – The segregation obligation ............................................................................................ 27

III.6. Issue 16 – Loss of financial instruments ......................................................................................... 27

III.7. Issue 17 ‐ External events beyond reasonable control ................................................................... 28

III.8. Issue 18 – Objective reason to contract a discharge ...................................................................... 28

IV. Part III: Transparency Requirements and Leverage ............................................................................... 29

IV.1. Issue 19 ‐ Article 4 Definition of leverage ....................................................................................... 29

IV.2. Issue 20 ‐ Article 22 Annual report ................................................................................................. 30

IV.3. Issue 21 ‐ Article 23 Disclosure to investors ................................................................................... 32

IV.4. Issue 22 ‐ Article 24 Reporting obligations to competent authorities ........................................... 34

IV.5. Issue 23 ‐ Article 25 Use of information by competent authorities, supervisory cooperation and limits to leverage .............................................................................................................................. 36

V. Part IV: Supervision ......................................................................................................................... 38

Issue 24a ‐ Cooperation arrangements between European competent authorities and the authorities of third countries required by Articles 34(1), 36(1) and 40(1) AIFMD .................................................... 38

Issue 24b ‐ Cooperation arrangements between European competent authorities and the authorities of third countries required by Articles 35(2), 37(7)(d) and 39(2)(a) of AIFMD ....................................... 39

V.2. Issue 25: Cooperation and exchange of information between competent authorities ............. 40

V.3. Issue 26: Authorisation of non‐EU AIFM ......................................................................................... 41


Introduction EFAMA welcomes CESR’s Call for Evidence on Implementing measures on the Alternative Investment Fund Managers Directive (“Call for Evidence”). We are grateful for the opportunity to express our preliminary views on the upcoming implementing measures to the AIFMD. EFAMA understands that ESMA is working under a tight deadline set by the European Commission to prepare advice on extensive set of implementing measures and to prepare a vast amount of technical standards and guidelines. We understand that this tight deadline is reflected in the short deadline of the Call for Evidence. EFAMA regrets that the Call for Evidence has been issued with an extremely short deadline over a holiday period. Furthermore, the consultation period coincides with other important consultations, such as the Consultation on legislative changes to the UCITS depositary function and to the UCITS managers remuneration, the Consultation on the review of the Markets in Financial Instruments Directive (MiFID), the Consultation on legislative steps for the Packaged Retail Investment Products initiative and the Consultation on the Review of the Insurance Mediation Directive (IMD). Given the impact these legislative measures will have on the savings and pensions of hundreds of millions of Europeans, longer consultation periods would have been preferable and necessary. In this Position Paper, EFAMA submits the first reactions and input received by its Members within the short consultation period. EFAMA Members have indicated that because of the time constraints they have for the time being focused their responses on a number of key issues. EFAMA and its members appreciate the opportunity to provide further comments and input as the ESMA consultation process continues.

General Remarks Prioritisation and Sequencing of Advice EFAMA agrees that the development of implementing measures on the AIMFD is a challenging program of work given the extensive set of implementing measures and the wide range of topics covered. We believe that the Commission’s intention to deliver the entire package at the latest one year before the end of the transition period imposes a very ambitious timeline on ESMA as well as the Commission. In this context, EFAMA welcomes the Commission’s encouragement to ESMA to consider the appropriate prioritisation and sequencing of the advice within each section of the mandate. EFAMA agrees that not all the implementing measures need to be pursued at this time. In particular, implementing measures regarding the Third Country Passport could be considered at a later point in time. Furthermore, some of the Commission’s requests on certain issues are very detailed although they seem relevant only to a very small number of AIF or only in limited circumstances. These requests should also not be treated as a first priority.


Technical Standards and Guidelines (Level 3 Measures) The AIFMD also provides for an extensive set of technical standards and guidelines which are not covered by the Mandate. EFAMA agrees with the Commission’s invitation to ESMA to coordinate work on these technical standards and guidelines with the development of advice on Level 2 measures. It is important to provide clarity about the applicable standards in due time before the AIFMD enters into force at national level. An example mentioned in this context were the implementing technical standards and guidelines to harmonise the authorisation procedure for AIFM or the notification procedure for AIF as well as details of information to be submitted to the authorities. Alignment with existing legislative framework (UCITS and MiFID) Many EFAMA Members which in the future will be authorized as AIFM already hold an authorization as UCITS Management Companies or MiFID Firms. As mentioned by the Commission throughout the Call for Evidence and the Commission’s request, many of the issues of this Call for Evidence have already been addressed for UCITS Management Companies, UCITS Funds and MiFID Firms in the MiFID and the UCITS Directives and implementing measures. Extensive work has been carried out in the preparation of these Directives, the relevant Level 2 and Level 3 measures and the related technical advice. EFAMA therefore particularly welcomes the invitation by the Commission to ESMA to consider the existing legislative framework and to seek as much cross‐sectoral consistency as possible while ensuring that rules are appropriate and proportionate for the specific circumstances of the AIFM and the AIF as well as their investors. In EFAMA’s view existing legislation under both UCITS and MiFID should serve as a starting point for ESMA’s work. However, given the very broad scope of the AIFMD, neither the UCITS nor MiFID rules can in their existing form provide appropriate regulation on all issues covered in the mandates by the Commission. The UCITS and MiFID rules should therefore serve as basis for ESMA’s drafting but the AIFMD Level 2 rules should be prepared in a proportionate and differentiated way in order to take into account the wide variety of structures under the scope of the AIFMD. Furthermore, EFAMA Members mentioned that consistency should be sought with the Prospectus Directive which already affects the operation of many closed‐ended funds and should be taken into account when drawing up appropriate regulation.


Questions for the Call for Evidence

Question 1 for the call for evidence Which categories of investment manager and investment fund will fall within the scope of the Alternative Investment Fund Managers in your jurisdiction? Please provide a brief description of the main characteristics of these entities (investment strategies pursued, underlying assets, use of leverage, redemption policy etc).

Very few EFAMA Members have provided us with information regarding the categories of investment managers and investment funds which will fall within the scope of the AIFMD in their respective jurisdictions. Their answers were not exhaustive and by far do not cover all Member States or all managers and products concerned. Their answers are included in the replies which they will submit directly to ESMA. For all of these reasons, they have not been included herein.

Question 2 for the call for evidence Among the topics that will be covered by the implementing measures, which do you consider would be most appropriately adopted in the form of regulations or directives? Please explain your choice.

All EFAMA members fully support the principle of harmonisation. Some EFAMA members consider that regulations would be the most appropriate instruments to cover most topics as they ensure a higher level of European harmonisation as compared to directives by avoiding divergent national transpositions. However, given the very wide range of AIFs and AIFMs covered by the AIFMD, and the need to provide for both EU‐based and non‐EU AIF and AIFM, some EFAMA members believe it impossible and impractical at this stage to draw up regulations that will be workable across the piece from the outset. They therefore favor the wide spread use of directives until such time as there is greater clarity about the extent and nature of the AIF and AIFM populations. Those holding this view acknowledge, though, that regulations are appropriate as regards reporting to regulators and investors, where consistency is important from the outset for investors, managers and regulators.

Question 3 for the call for evidence Can you identify useful sources of data and statistical evidence from which CESR could benefit in the preparation of its advice? The AIFMD covers a very wide range of AIF and AIFM. For many of these products and managers, no statistical evidence exists and therefore, no complete statistics are available. EFAMA Members for the most part manage both UCITS and nationally regulated non‐UCITS. Information regarding these products is usually included on the websites of national regulators. For listed products, further information may be obtained from stock exchanges. As further sources of data and statistical evidence could be named the larger distribution platforms or central clearing houses like Clearstream or Euroclear. The European Central Bank also keeps a record of investment funds.


Provisional Request to CESR for Technical Advice on Possible Level 2 Measures concerning the Future Directive on Alternative Investment Fund Mangers

II. Part I: General provisions, authorisation and operating conditions II.1. Issue 1 – Article 3 Exemptions Issue 1 a) – Opt‐in procedure for AIFM below the threshold

1. CESR is requested to advise the Commission on the procedures for AIFM which choose to opt‐in

under this Directive in accordance with Article 3(4). CESR should consider whether there are specific reasons not to use the same procedure that applies to AIFM that do not benefit from this exemption.

EFAMA agrees that the same procedures should apply to opting‐in AIFM (whether EU or non‐EU) as apply to AIFM that do not benefit from the exemption. This will ensure a level playing field among all AIFM.

2. This advice should include procedures specific to the case of AIFM from third countries seeking

to opt in after the phasing‐in of the third country regime; in particular the determination of the Member State of reference.

In applying procedures to non‐EU AIFM, it is important that different legal structures and regulatory regimes are accommodated. Such regimes may provide a similar level of investor protection but adopt a different approach to providing that protection or use alternative means to achieve the same end result. Issue 1 b) – Thresholds – calculation, oscillation, obligations below thresholds

As a general comment regarding questions 5 ‐ 8, EFAMA questions the need for such detailed advice to be provided at this stage. It is likely that only very few AIF or AIFM will fall into this category, and of these many may, for other reasons, wish to opt to be treated as if the exemption did not apply. Therefore, in line with the invitation by the Commission to ESMA to seek an appropriate prioritization and sequencing of the advice, EFAMA suggests ESMA to address the issues mentioned in questions 5 ‐ 8 at a later point in time.

1. CESR is requested to advise the Commission on how to identify the portfolios of AIF under

management by a particular AIFM and the calculation of the value of assets under management by the AIFM on behalf of these AIF.

In terms of assets under management calculation, EFAMA is in favour to apply similar criteria as for UCITS management companies. However, a distinction could be drawn between open‐ended and closed‐ended AIF. For closed‐ended AIF, the calculation should be based on the nominal value of the shares. A subsequent rise in value of the assets of the AIF (and not issuance of new shares) during the life of the AIF should not have as a consequence that the AIFM comes into the scope of the AIFMD and thus should not be reflected in the calculation of the assets under management of the AIFM.


2. The advice should identify options on how to determine the value of the assets under management by an AIF for a given calendar year. It should indicate the method or methods CESR regards as preferable.

For each AIF managed by an AIFM, information on value of the assets under management of the AIF will be included in the annual report of the AIF which is audited by external auditors. Some types of AIF will in addition provide NAVs or balance sheet figures very regularly. Given the wide range of AIF, EFAMA suggests that the information provided in the audited annual report should be the basis, with the AIFM being allowed to use a different total assets under management figure when it has changed significantly from the last annual reports of the AIF it manages.

3. CESR is invited to consider how the use of different forms of leverage influences the assets under

management by an AIF and how this should best be taken into account in the calculation of assets under management.

EFAMA underlines that leverage is a different measure to assets under management and the two should not be confused. In terms of assets under management calculation, EFAMA is in favour to apply similar criteria as for UCITS management companies. The question of calculation of leverage is addressed in Issue 19. There are a number of different measures used which means that it may be problematic to include a leverage measure in the calculation of assets under management. It is noteworthy that many UCITS can use leverage and that this is not typically included in the calculations of assets under management for UCITS.

4. CESR is requested to advise the Commission on how best to deal with potential cases of cross‐holdings among the AIF managed by an AIFM, e.g. funds of AIF with investments in AIF managed by the same AIFM.

In case of investment of an AIF into another AIF managed by the same AIFM (“internal” fund of funds structure) it is standard statistical practice to avoid the double‐counting of assets. In case of “external” fund of fund structures, on the other hand, it would be reasonable to count those AIF (or UCITS) units as part of the AIF invested, even though when providing commentary on industry level statistics, such double counting is usually avoided.

5. CESR is requested to advise the Commission on how to treat AIFM whose total assets under

management occasionally exceed and/or fall below the relevant threshold in a given calendar year. As part of this work, CESR is requested to specify circumstances under which total assets under management should be considered as having occasionally exceeded and/or fallen below the relevant threshold in a given calendar year.

EFAMA agrees that circumstances under which total assets under management should be considered as having occasionally exceeded the relevant threshold in a given calendar year should be specified. EFAMA suggests that, when the total assets under management have exceeded the relevant threshold over a given period of time (for example over 3 or 6 months) by a given percentage (for example 10%), the AIFM should be required to comply with the full Directive.


6. CESR is requested to advise the Commission on the content of the obligation to register with national competent authorities for the entities described in Article 3(2).

7. CESR is requested to advise the Commission on suitable mechanisms for national competent authorities in order to gather information from these entities in order to effectively monitor systemic risk as set forth in Article 3(3). To that end, CESR is requested to specify the content, the format, and modalities of the transmission of the information to be provided to competent authorities. CESR is invited to consider the consistency with its advice regarding the Issue 25 (reporting obligations to competent authorities).

8. CESR is requested to advise the Commission on the obligation of AIFM to notify competent authorities in the event they no longer comply with the exemptions granted in Article 3(2).

II.2. Issue 2 – Article 9 Initial capital and own funds

Many EFAMA Members which in the future will be authorized as AIFM already hold an authorization as UCITS Management Companies and/or as MiFID Firms. Given that there will be many managers who will hold both or even all three licenses, EFAMA urges ESMA to seek an alignment between the initial capital and own funds requirements of the AIFMD and UCITS Directive. Further, as a general comment regarding additional own funds and the professional indemnity insurance in view of potential risks arising from professional negligence, no double insurance coverage of operational risks should be required. It is important to take into account any insurance protection provided for delegated activities at the level of a delegatee company.

1. CESR is requested to provide the Commission with a description of the potential risks arising from professional negligence to be covered by additional own funds or the professional indemnity insurance referred to in Article 9(7).

EFAMA believes that it is difficult to provide a description of potential risks as these risks will be changing due to changing circumstances, business models or risk crystallization. Instead of providing a description of the potential risks EFAMA suggests to allow more flexibility by determining the high level risk groups which should be covered by the additional own funds or the professional indemnity insurance. This approach could allow that AIFM a flexible arrangement which develops over time to reflect any internal or external changes. This would be consistent with the approach taken by the Insurance Mediation Directive (2002/92/EC) contributing to a level playing field and might cover, for example, professional negligence and losses arising from breaches of the regulatory system or civil law.

2. CESR is requested to advise the Commission on how the appropriateness of additional own funds

or the coverage of the professional indemnity insurance to cover appropriately the potential professional liability risks arising from professional negligence referred to in Article 9(7) should be determined, including – to the extent possible and appropriate ‐ the methods to calculate the


respective amounts of additional own funds or the coverage of the professional indemnity insurance.

EFAMA draws the attention of ESMA to the difficulty for internally managed funds to comply with the requirements of additional own funds or the coverage of the professional indemnity insurance.

3. CESR is requested to advise the Commission on the best way to determine ongoing adjustments

of the additional own funds or of the coverage of the professional indemnity insurance referred to in Article 9(7).

For level playing field reasons, the Insurance Mediation Directive (2002/92/EC) can be taken as a reasonable starting point for regulation. The IMD requires the limits of indemnity to be reviewed every five years and to take into account movements in European consumer prices. The amount of additional own funds could be based upon the size of the policy excess (a larger excess requiring greater volume of additional own funds).

4. CESR is invited to take account of work done in the context of the Capital Requirements Directive

and to liaise as appropriate with CEBS and CEIOPS on this issue. EFAMA would like to remind ESMA that the work undertaken in the context of the Capital Requirements Directive has not been finalised yet and that it might seem premature at this stage to integrate it in this reflection. Furthermore, the amended CRD does not include any requirements in relation to professional indemnity insurance, and the purpose of the capital held under CRD (in relation to an asset manager, which is not necessarily the same thing as an AIFM) is to facilitate an orderly wind‐down of the firm rather than to cover potential professional liability risks. II.3. Issue 3 ‐ Article 12 General principles In EFAMA’s view existing legislation under both UCITS and MiFID should serve as a starting point for ESMA’s work. However, given the very broad scope of the AIFMD, neither the UCITS nor MiFID rules can in their existing form provide appropriate regulation on all issues covered in the mandates by the Commission. The UCITS and MiFID rules should therefore serve as basis for ESMA’s drafting but the AIFMD Level 2 rules should be prepared in a proportionate and differentiated way in order to take into account the wide variety of structures under the scope of the AIFMD.

1. CESR is requested to advise the Commission on criteria to be used by the relevant competent authorities to assess whether AIFM comply with their obligations under Article 12(1).

Many AIF have AIFM which are authorized UCITS management companies. Other AIF have appointed MiFID investment managers as AIFM. EFAMA therefore welcomes the encouragement by the Commission to ESMA to target an appropriate level of consistency with UCITS and MiFID while taking due account of the differences between the regulated entities. Implementing measures should be closely aligned with implementing measures for UCITS Directive and MiFID.


However, given the vast diversity of AIFM and AIF covered by the AIFMD, it will be important that the principle of proportionality should be taken into due account when assessing whether AIFM comply with their obligations under the AIFMD. For example, risk management may be organised differently with respect to a leveraged hedge fund or a plain real estate fund or a quasi‐UCITS type of fund.

II.4. Issue 4 ‐ Article 14 Conflicts of interest Regarding conflicts of interests in EFAMA’s view existing legislation under both UCITS and MiFID should serve as a starting point for ESMA’s work. However, given the very broad scope of the AIFMD, neither the UCITS nor MiFID rules can in their existing form provide appropriate regulation on all issues covered in the mandates by the Commission. The UCITS and MiFID rules should therefore serve as basis for ESMA’s drafting but the AIFMD Level 2 rules should be prepared in a proportionate and differentiated way in order to take into account the wide variety of structures under the scope of the AIFMD. Accordingly EFAMA suggests that an AIFM should, for example, have a documented conflict of interest policy along the lines of those required under MiFID and UCITS.

1. CESR is requested to provide the Commission with a description of the types of conflicts of interests between the various actors as referred to in Article 14(1).

EFAMA suggests that ESMA should use the MiFID and UCITS regulatory frameworks as a starting point and would like to refer to the description of types of conflicts of interest in these directives and their implementing measures.

2. CESR is requested to advise the Commission on the reasonable steps an AIFM should be expected to take in terms of structures and organisational and administrative procedures in order to identify, prevent, manage, monitor and disclose conflicts of interest.

EFAMA welcomes the encouragement by the Commission to ESMA to target an appropriate level of consistency with UCITS and MiFID frameworks while taking due account of the differences between the regulated entities. Level 2 measures should be closely aligned with implementing provisions for UCITS Directive and MiFID. II.5. Issue 5 – Article 15 Risk management EFAMA welcomes that the Commentary regarding Risk Management in the Call for Evidence encourages ESMA to take account of its extensive prior work in the area of risk management to the extent that the results of the work are compatible with the provisions of the AIFMD. Furthermore EFAMA appreciates the call for coherence with the requirements imposed by MiFID and/or UCITS while taking account of the differences between the regulated sectors. The risk management framework introduced by the UCITS IV Directive represents a high quality standard which should be appropriate also for management of risks arising from AIF management. In particular,


CESR’s Risk Management Principles for UCITS and CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS are both useful documents which should be used as a benchmark, subject to appropriate adaptation to reflect the wider range of AIF, in particular their wide range of eligible assets as compared to UCITS, and their professional investor base. As a general comment, the risk management process should be appropriate and proportionate in view of the nature, scale and complexity of the AIF. There should be flexibility in the requirements as it may be disproportionate for a smaller AIFM to establish a separate risk management function. Smaller AIFM should be able to demonstrate that they have specific safeguards against conflicts of interest which allow for an independent oversight of the risk management function. AIFM must be given the flexibility to select the most appropriate methodologies to measure and monitor their AIF’s risk exposures depending on the nature of the AIF. The calculation methodologies (for example commitment approach or VaR) should be applied consistently, but the AIFM should have the flexibility to select the most appropriate methodology. For AIFs with particular and unusual features, other measurement techniques should be acceptable where deemed appropriate by the AIFM and the local regulator, depending on the nature of the AIF and of the investment techniques and instruments used.

1. CESR is requested to advise the Commission on the risk management systems to be employed by AIFM as a function of the risks that the AIFM incurs on behalf of the AIF that it manages and on the criteria that competent authorities should take into account when assessing for the AIF managed by the AIFM whether the risk management process employed by the AIFM is adequate in order to identify measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or can be exposed. In particular, CESR is requested: a) to advise on the categories of risk relevant to each AIF investment strategy and to which each AIF is or can be exposed and the methods for identifying the risks that are relevant for the particular AIF investment strategy or strategies so that all risks are adequately identified.

EFAMA is of the opinion that question 1 a) requesting advice on the categories of risk relevant to each AIF strategy is too detailed. It should be left to the AIFM to identify risks to which the AIF can be exposed and the methods for identifying the risks. EFAMA suggests that AIFM maintain a risk management policy including a mapping of the risks of each AIF they manage and the risk monitoring methods applied. AIFM should at least consider market risk, liquidity risk, operational risk, credit risk as well as the main risks that are specific to the relevant investment strategy. Such specific risks may be for example sensitivity to long/short equity spread, big cap/small cap spread, credit spread, options greeks, term structure as well as sensitivity to corporate events, country risks, legal risks, regulatory risks, and size of the AIF.

b) to advise, to the extent possible, on methods for quantifying and measuring risks including the conditions for the use of different risk measurement methodologies in relation to the identified types of risk so that overall risk exposures as well as contributions to overall risk from each risk factor are properly measured.


Regarding the methodologies (question 1 (b)) due to the very individual risk profiles of AIFM the decision which methodology to use for measuring these risks should be left to the AIFM. Although many risks of AIFs may be of a qualitative nature, the AIFM should endeavour to define quantitative measures for each risk identified. The AIFM could identify the key risks of each investment strategy it manages. The management of the AIFM should set risk limits for such key risks. When possible compliance with such risk limits should be monitored on a systematic basis using quantitative risk measures. Both the risks and the risk measurement methodologies will be specific to each AIFM / AIF. As a part of the Risk Management Policy the AIFM should define the methods used for measuring the key risks of the AIFs it manages.

c) to advise on adequate methods for managing and monitoring all such risks so that the AIF risk exposures respect at all times the risk objectives of the AIF.

2. CESR is requested to advise the Commission on the appropriate frequency of review of the risk

management system. CESR is invited to consider whether the appropriate frequency of review varies according to the type of AIFM or the investment strategy of the AIF.

Generally, the frequency of review need be no more than annual. Any variation in frequency should reflect the nature of the AIF managed by a particular AIFM (and the underlying assets), rather than the “type” of AIFM.

3. CESR is requested to advise the Commission on the conditions for the appropriate risk

governance structure, infrastructure, reporting and methodology, in particular, on how the risk management function shall be functionally and hierarchically separated from the operating units, including the portfolio management function.

4. CESR is requested:

a) to advise how the principle of proportionality is to be applied by competent authorities in reviewing the functional and hierarchical separation of the functions of risk management in accordance with Article 15(1). b) to advise on criteria to be used in assessing whether specific safeguards against conflicts of interest allow for the independent performance of risk management activities and that the risk management process satisfies the requirements of Article 15 and is consistently effective. This advice will be particularly relevant in cases where full separation of functions is not considered proportionate. CESR is encouraged to provide the Commission with a non‐exhaustive list of specific safeguards AIFM could employ against conflicts of interest referred to in the second subparagraph of Article 15(1).

5. CESR is requested to advise the Commission on the content of the requirements referred to in

Article 15(3).

6. This advice should at least address the following issues:

a) the content of an appropriate, documented and regularly updated due diligence process when investing on behalf of the AIF, according to the investment strategy, the objectives and risk profile of the AIF;


b) the criteria to be used by competent authorities when assessing whether the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured managed and monitored on an ongoing basis, including through the use of stress testing; c) appropriate stress testing procedures and their frequency pursuant to Article 15(3)(b); d) the criteria to be used in assessing whether the risk profile of the AIF corresponds to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the AIF rules or instruments of incorporation, prospectus and offering documents.

Proportionality is particularly important regarding the due diligence processes for AIF investment (question 6a) and regarding the conduct of stress tests (question 6c), in order to keep the requirements at an administrable level. The regulatory framework should contain that stress testing is required where appropriate. The actual procedures should then be determined by the AIFM. Regarding question 6b), identifying, measuring, managing the risks associated with each investment position of the AIF on an ongoing basis would not be relevant as such to identify activities presenting systemic risk, as positions can be negatively correlated. It would be more adequate to perform this exercise at the level of each investment strategy, as AIFM might regroup some positions in different categories in order to appropriately and efficiently monitor the global risk of the portfolio. Moreover, it would be burdensome for competent authorities to undertake due diligence on the risk management process at the technical detail.

II.6. Issue 6 ‐ Article 16 Liquidity management In EFAMA’s view existing legislation under both UCITS and MiFID should serve as a starting point for ESMA’s work. However, given the very broad scope of the AIFMD, neither the UCITS nor MiFID rules can in their existing form provide appropriate regulation on all issues covered in the mandates by the Commission. The UCITS and MiFID rules should therefore serve as basis for ESMA’s drafting but the AIFMD Level 2 rules should be prepared in a proportionate and differentiated way in order to take into account the wide variety of structures under the scope of the AIFMD. EFAMA is in particular concerned that any measures regarding liquidity management should not be based on the belief that illiquidity is necessarily a bad thing. Institutional investors may, for sound reasons, wish access to illiquid investments. For example, they may have made a specific choice to invest in less liquid investments in the hope of an improved return in the longer term. When using open‐ended vehicles for this purpose they understand that there may be circumstances in which deferral may be necessary. Any measures should not prevent or hamper such deferrals.

1. CESR is invited to advise the Commission on the content of rules that are proportionate and

necessary for specifying the general obligations placed on AIFM by Article 16(1) and (2). Regarding advice on Liquidity Management, EFAMA agrees with the invitation by the Commission to ESMA to take full account of the differences between different types of AIFM, the diversity of AIF investment strategies and the content of the corresponding provisions in other directives while taking due account of the differences between the regulated entities. There are many different types of AIF with different liquidity characteristics so different measures of liquidity will be appropriate for different types of AIF.


Proportionality is crucial given the diversity (investment strategies, liquidity profile and issuance and redemption provisions) of AIF covered by the AIFMD. Therefore, requirements need to be as flexible as possible and not too prescriptive. Criteria to be taken into account include, for example for open‐ended types of AIF, differentiation on the basis of portfolio assets and targeted categories of investors. EFAMA suggests to adopt a similar approach as for UCITS. For UCITS, Directive 2010/43 requires that management companies “employ an appropriate liquidity risk management process in order to ensure that each of the UCITS they manage is able to comply at any time with Article 84(1) of Directive 2009/65/EC”. This is supplemented by Level 3 measures ‐ CESR’s ‘Risk Management principles for UCITS’ (CESR/09/178). EFAMA underlines that open‐ended fund’s should continue to have the possibility to defer issuances and redemptions if such possibility has been included in the issuance and redemption policy. Investors may wish access to illiquid investments and understand that there may be circumstances in which deferral may be necessary. It would not be in the interests of investors to restrict the fund’s ability to invest because of liquidity requirements which do not take into account the fund’s ability to defer issuances and redemptions.

2. In particular, CESR is invited to advise on: a) the systems and procedures to be implemented by the AIFM in order to comply with its

obligations under Article 16(1), having regard for the appropriateness of these systems and procedures for different types of AIFM and the AIF they manage.

Systems and procedures to be implemented by the AIFM in order to comply with its obligations under Article 16(1) will need to ensure that an AIF consequently has liquid assets to invest, meet investor redemptions (if available) and margin calls, and to pay creditors and expenses. EFAMA Members pointed out that it should be fundamental to the launch process of any new AIF that the AIFM considers the liquidity versus redemption cycle analysis in detail. In open‐ended funds, the potential need to have recourse to redemption or issuance gates or side pocketing should be considered at launch, especially where open‐ended AIFs are likely to invest in hard to value or less liquid assets as part of their objective.

b) the content of the obligation for AIFM to regularly conduct stress tests, under normal and

exceptional liquidity conditions, which enable it to assess the liquidity risk of the AIF and monitor the liquidity risk of the AIF accordingly.

EFAMA suggests that regular reviews should be made of AIFs which are particularly sensitive to liquidity risk based on their assets. Stress testing requirements should, likewise, take into account the flexibility of an AIF’s issuance and redemption provisions. Any significant issues arising from these reviews should be reported to the AIFM’s and AIF’s governing bodies. These reviews would typically involve stress testing and scenario analysis of liquidity within an AIF.

c) the circumstances under which the investment strategy, liquidity profile and redemption policy for each AIF managed by an AIFM can be considered to be consistent. In this context, CESR is invited to consider all relevant aspects of the redemption policy, including mechanisms that


can be invoked in exceptional circumstances, and assess their consistency with the investment strategy and liquidity profile.

As a general remark EFAMA Members pointed out that it is essential that AIFM ensures that AIF’s documentation addresses the redemption policy as well as the liquidity profile given the complexities of linking the redemptions to the liquidity of an AIF’s underlying assets. EFAMA Members mentioned that redemption gates and other measures such as the use of side pockets should not be used as part of the standard redemption management cycle. However, they may be essential in order to protect investors in the event of unusual or unforeseeable market conditions. Should there be significant redemptions from an AIFM for an AIF holding illiquid assets, the remaining investors will be left with a greater holding of an illiquid portfolio that is harder to value accurately and realise quickly. AIFM need to ensure where possible that remaining investors do not suffer because of others redeeming. AIFM also need to ensure the redeeming investor receives a fair price. In some cases redemption gates are used to defer or stagger the payment of redemption proceeds over a matter of days or weeks.

II.7. Issue 7 ‐ Article 17 and Article 61 (new Article 50a in UCITS) Investment in securitisation positions

1. CESR is invited to advise the Commission on the content of rules that are necessary and

proportionate for an AIFM to fulfill its obligations under Article 17.

As a general remark, EFAMA has strong concerns regarding the applicability of the requirements set out in Article 17 of the AIMFD to securitisation positions issued after 1 January 2011. While the requirements already apply to any securitisation position issued after 1 January 2011, the future implementing measures of the AIFMD are still unknown and will not become binding at national level for several years. This creates a legal uncertainty for AIFM regarding the conditions for investing such securities. Therefore, EFAMA suggests that ESMA should advise upon a practicable approach to this issue. As regards obligations on the AIFM, checking that the sponsor/originator has published the required commitment prior to purchase should be sufficient for asset managers. The primary obligation here is on the originators. AIFM, and other types of investors, must be able to rely on statements published by them, and there is no good reason to place greater due diligence obligations on AIFMs than on other investors.

2. In particular, CESR is invited to advise on: a) the requirements to be met by the originator, the sponsor or the original lender, in order for an AIFM to be allowed to invest in securities as defined in Article 17. b) the qualitative requirements to be met by an AIFM in order to comply with their obligations under Article 17.

As regards the qualitative standards mentioned in question 2b), EFAMA urges ESMA to bear in mind the practicability and reasonableness of the overall approach. EFAMA believes that for an investor, it is impossible to monitor on an ongoing basis that the retention is maintained by an originator. Furthermore, there are no provisions as to where the issuer has to disclose


this information. AIFM and UCITS managers should be provided with sufficient information by imposing an obligation on issuers/originators to represent in the prospectus or other issuing information at the time of issue of any securitized product that the issuer/originator has and will retain a net economic interest of 5% and permitting the manager to rely on this prospectus representation for the lifetime of the product. In line with the CEBS Guidelines on Article 122a, investors in securitised debts must suffer no detriments in case the originator, sponsor or original lender fails to act in the manner specified in the disclosed statement. EFAMA believes that the same principle should apply here and accordingly the AIFM should not be bound to dispose of a securitisation position for which no adequate retention has been made, or be subject to other kind of sanctions in this regard, provided that it has duly verified the existence of a relevant retention commitment before executing the investment.

II.8. Issue 8 – Section 2 Organisational requirements, Article 18 General principles Existing legislation under both the UCITS and MiFID rules should serve as a starting point for implementing measures regarding organizational requirements. In many cases AIFM act as UCITS management companies and/or MiFID firms so consistency in processes would be highly desirable. In EFAMA’s view existing legislation under both UCITS and MiFID should serve as a starting point for ESMA’s work. However, given the very broad scope of the AIFMD, neither the UCITS nor MiFID rules can in their existing form provide appropriate regulation on all issues covered in the mandates by the Commission. The UCITS and MiFID rules should therefore serve as basis for ESMA’s drafting but the AIFMD Level 2 rules should be prepared in a proportionate and differentiated way in order to take into account the wide variety of structures under the scope of the AIFMD. Due consideration should however be given to the differences between AIFM and AIF on the one hand and the MiFID Firms UCITS Management Companies and the UCITS on the other hand. It is important to ensure sufficient flexibility for AIF structures.

1. CESR is invited to advise the Commission on the content of rules that are proportionate and necessary for specifying the general obligations placed on an AIFM by Article 18(1).

Please see above.

2. In particular, CESR is requested to advise on the procedures and arrangements to be implemented by the AIFM, having regard to the nature of the AIF managed by the AIFM, in order to comply with its obligations under Article 18(1).

Please see above.


II.9. Issue 9 ‐ Article 19 Valuation

As a general remark regarding valuation, EFAMA would like to caution ESMA against applying the relevant provisions on UCITS to all AIFs. The differences between UCITS and AIFs and between different AIF regarding investment strategies, invested assets and investors make it necessary that ESMA should ensure sufficient flexibility. The AIFM Directive does not elaborate on what constitutes the “valuation function” for the purpose of Articles 19(4), (5), (6), and (9). Articles 19(2) and (3), however, distinguish between the “valuation of assets” and “the calculation of the net asset value per share or unit of the AIF”. On that basis and given the long‐established practice in the fund business at national level, EFAMA Members assume that the valuation function referred to in Articles 19 (4), (5), (6) and (9) comprises only the valuation of assets and does not extend to the calculation of a fund’s NAV which should be permitted to be conducted by a different entity.

CESR is invited to advise the Commission on:

1. The criteria concerning the procedures for the proper valuation of the assets and the calculation

of the net asset value per share or unit to be used by competent authorities in assessing whether an AIFM complies with its obligations under Article 19(1) and Article 19(3).

CESR is invited to consider how these procedures should be differentiated to reflect the diverse characteristics of the assets in which an AIF may invest.

The Level 2 measures should concern the governance and oversight of the valuation process, including roles and responsibilities, the existence of pricing policies, pricing committees, fair value pricing and so on. EFAMA Members further underlined the importance that any measures should recognize existing regulatory and industry standards, among them the IOSCO principles for hedge fund valuation in 2007 and the Hedge Fund Standards Boards standards for valuation of hedge fund assets. Given the heterogeneous nature of AIF assets and liquidity it is essential that ESMA’s advises on the types of procedures and considerations AIFM should consider when valuing assets rather than providing a prescriptive list of if procedures which have to be followed. ESMA should also note that valuations are intimately linked to the relevant accounting standards adopted by a specific AIF and so will inevitably vary from AIF to AIF. Until common global standards are reached for a number of different assets whether purchased by an AIFM, UCITS, credit institution or MiFID firm differences in approach will remain. The valuation of an AIF will often reflect the valuation of a number of hard to value underlying assets based on information gleaned from a number of different pricing and valuation sources. AIFM need to ensure that investor confidence is retained in the robustness of the process used. It is also important that CESR recognises the role of corporate boards of AIFs who may directly be responsible for the appointment of valuers rather than the AIFM. The AIFM’s role in deciding on difficult valuation issues in these circumstances may well be different from a more standard UCITS‐style management company.


2. The type of specific professional guarantees an external valuer should be required to provide so as to allow the AIFM to fulfill its obligations under Article 19(5).

CESR is asked to consider the impact of the required guarantees on the availability of external valuers to the AIFM industry.

As a preliminary remark, EFAMA Members requested clarification that the term “professional guarantee” should in the present context be understood as proof of competency and not as legal guarantee given by the valuer to the AIFM to guarantee the fulfillment of its obligations.

3. The frequency of valuation carried out by open‐ended funds that can be considered appropriate

to the assets held by the fund and its issuance and redemption frequency. EFAMA asks that ESMA should abstain from defining specific valuation cycles but rather, to develop general criteria for assessment of appropriate frequency of valuation by AIF. In the context of open‐ended funds, it is the NAV calculation frequency which should be closely correlated with the issuance and redemption policy of an AIF in order to allow for effective pricing of fund units. The official net asset value of an open‐ended AIF should therefore be calculated at least each time there are or may be subscriptions or redemptions in the AIF. As regards valuation of fund assets, on the other hand, due regard should be paid to the nature of assets under consideration. For instance, real estate holdings cannot reasonably be expected to be valued on a daily or even monthly basis, especially since no relevant changes to real estate markets are ascertainable in such a short term. Similar issues pertain to other rather illiquid investments held by open‐ended AIF such as PPP holdings or shares in non‐listed companies. Hence, the valuation cycle of such assets must in the first place reflect the usual development rate of the relevant markets and should in principle allow for

quarterly or even semi‐annual valuations. II.10. Issue 10 – Article 20 Delegation of AIFM functions

EFAMA would appreciate if ESMA could seek a maximum alignment with the regime applicable to UCITS which has proved to work very well in practice providing sufficient flexibility for the market participants to allow the use of global expertise whilst at the same time providing a high level of investor protection.

1. CESR is invited to advise the Commission on the content of rules that are necessary and proportionate to ensure that an AIFM fulfils the conditions under Article 20(1) and Article 20(2).

2. In particular, CESR is invited to advise the Commission on the following, which are applicable

both to cases of delegation and sub‐delegation: a) the criteria that competent authorities should use to assess whether the reasons supplied to

justify the entire delegation structure of an AIFM are objective.

Given the wide range of AIF and AIFM covered by the AIFMD, it seems difficult to define an exhaustive list of criteria to use to assess whether the reasons supplied to justify the entire delegation structure of an


AIFM are objective. EFAMA urges ESMA to seek a flexible and proportionate approach. Instead, categories of criteria could be provided, leaving enough flexibility to regulators to consider each individual case. In this framework EFAMA reminds ESMA that in case of delegation, the AIFM’s liability towards the AIF and its investors will not be affected by the fact that the AIFM has delegated functions to a third party.

b) the circumstances under which a delegate should be considered to have sufficient resources to perform the tasks delegated to it by an AIFM; and to be of sufficiently good repute and sufficiently experienced to perform these tasks.

For a delegated entity which is an authorized or registered entity, these criteria should be assumed as satisfied by fact of the entity's continued authorization or registration. Where authorization or registration is not mandatory for a delegated entity, the competent authority may proceed with an objective test to ensure that the right to delegate is not abused. In view of such tests criteria should be defined and applied instead of leaving the determination of the test in each individual case, to give market participants necessary certainty and predictability ex ante.

c) the types of institutions that should be considered to be authorised or registered for the purpose of asset management and subject to supervision. CESR is invited to consider whether to employ general criteria or to specify categories of eligible institution in this context.

EFAMA suggests to employ a combination of general criteria and specific categories to cover easily identifiable categories of entities, but also allow proportional flexibility for the heterogeneous nature of AIF structures and asset managers. MiFID firms capable of performing asset management, UCITS firms and AIFM entities (excluding self‐managed AIFM) should automatically be considered suitably authorised. For non‐EU entities, authorisation/registration with local competent authorities should be sufficient.

d) in the event of a delegation of portfolio or risk management to an undertaking in a third country, how cooperation between the home Member State of the AIFM and the supervisory authority of the undertaking should be ensured.

EFAMA supports cooperation between the supervisory authorities by a simple cooperation/information sharing agreement which takes account of recent IOSCO standards and recommendations.

e) the circumstances under which a delegation would prevent the effective supervision of the AIFM, or the AIFM from acting, or the AIF from being managed, in the best interest of its investors.

It seems difficult to define circumstances under which a delegation would prevent the effective supervision. In this context, EFAMA reminds ESMA that one of the conditions to be complied with for delegation is that the delegation shall not prevent the effectiveness of supervision of the AIFM and that in case of


delegation, the AIFM’s liability towards the AIF and its investors will not be affected by the fact that the AIFM has delegated functions to a third party. It therefore does not seem necessary to define such circumstances.

3. CESR is invited to advise the Commission on the content of rules that are necessary and proportionate to ensure that an AIFM fulfils the conditions under Article 20(3).

4. In particular, CESR is invited to advise on: a) the type of evidence necessary for an AIFM to demonstrate that it has consented to a sub‐delegation

EFAMA considers that consent should simply be demonstrated by the AIFM in writing confirming its consent to the sub‐delegation to the delegate. It should not be necessary for the AIFM to be party to a sub‐delegation agreements ‐ such a requirement would be administratively burdensome and would lengthen the time taken to negotiate sub‐delegation agreements. The AIFM (and indirectly the AIF) should be adequately protected in respect of any sub‐delegations via the delegation agreement.

b) the criteria to be taken into account when considering whether a sub‐delegation would result in a material conflict of interest with the AIFM or the investors of the AIFM; and for ensuring that portfolio and risk management functions have been appropriately segregated from any conflicting tasks; and that potential conflicts are properly identified, managed, monitored and disclosed to the investors of the AIF.

It is generally understood that conflicts of interest do exist and that the portfolio management and risk management functions may not be capable of segregation from all conflicting tasks. Conflicts of interest need to be suitably managed and properly disclosed to investors. EFAMA does not perceive any pronounced risks of conflicting interests in this area.

c) the form and content the notification under Article 20(3) (b) should take in order to ensure that the supervisory authorities have been properly notified.

The supervisory authority could be properly notified by a written notification, containing details of the delegated entity and its competent authority (if authorised/registered), confirmation that the AIFM consents to the delegation, the relevant AIF(s) which are affected by the delegation, and the intended effective date of the delegation.

5. CESR is also invited to advise the Commission, in relation to Article 20(2), on the conditions under which the AIFM would be considered to have delegated its functions to the extent that it had become a letter‐box entity and could no longer be considered to be the manager of the AIF.

While as a general rule, EFAMA agrees that the UCITS Directive and its implementing measures should be the model for implementing measures for the AIFMD delegation, they recommend to take into account that many AIFs will not be managed by a UCITS‐style management company. ESMA should avoid direct


application of UCITS management company guidance without considering the fuller range of AIFs, AIF structures and their managers.


III. Part II: Depositary (Article 21)

III.1. Issue 11 – Contract evidencing appointment of the depositary

1. CESR is requested to advise the Commission on the necessary particulars to be found in the

standard agreement evidencing the appointment of the depositary. In its advice, CESR should take into account the consistency with the respective requirements in the UCITS Directive.

EFAMA supports the principle following which requirements concerning the depositary activities under the AIFMD should, insofar as possible, be convergent with corresponding requirements already contained in the UCITS and/or MiFID Directives, unless the specificities of the AIF’s (e.g. in terms of legal structure,…) justify tailored provisions. Concerning the particulars to be included in the agreement with the depositary, EFAMA considers that the provisions contained in Articles 30 and following of the Commission Directive 2010/43/EU (implementing the UCITS Directive 2009/65/EC) would also provide, a relevant framework in the context of the AIFMD, subject to appropriate adaptations. The list of elements to be included in the agreement should, however, not be limitative and preserve a level of flexibility which is sufficient to allow the parties to fine‐tune the contents of the agreement to their particular needs (depending, for instance, on the type of AIF and its legal structure, the type of assets to be safe‐kept by the depositary, the applicable law…).

2. CESR is encouraged to provide the Commission, if possible, with a draft model agreement. Given the wide variety of AIF’s covered by the Directive, the wide range of assets and regions in which these AIF are allowed to invest and also because of significant differences in the civil, contractual and other laws among Member States, EFAMA believes that it would be an almost impossible task to draft a single model agreement applicable to every situation. EFAMA believes that drafting such a model agreement could cause a conflict of laws situation which would not be helpful in terms of providing legal clarity for the market participants. We therefore strongly recommend ESMA and the EU Commission to limit themselves to list the key elements and particulars that the depositary agreement should contain without being too prescriptive in its detailed contents. Such an approach was already successfully followed in the context of the implementing measures of the UCITS IV Directive and would, in our opinion, be sufficient to ensure a high degree of convergence.

III.2. Issue 12 ‐ General criteria for assessing equivalence of the effective prudential regulation and supervision of third countries

1. CESR is requested to advise the Commission on the criteria for assessing whether the prudential

regulation and supervision applicable to a depositary established in a third country with respect to its depositary duties are to the same effect as the provisions laid down in European law. In this regard, CESR is invited to take into account at least whether the depositary:

• is subject to specific capital requirements for the safe‐keeping of assets. • is subject to supervision on an ongoing basis. • provides sufficient financial and professional guarantees to be able to effectively pursue

its business as a depositary and meet the commitments inherent to that function. • is subject to rules as stringent as those laid down in Article 21 AIFMD


2. CESR is requested to advise the Commission specifying the criteria for assessing that prudential regulation and supervision of a third country applicable to the AIF depositary with respect to its depositary duties established in a third country is to be considered as effectively enforced. Inter alia, CESR should take into account whether the depositary is subject to the oversight of a public authority, meaning that, at least:

• the authority has the power to request information from the depositary • the authority has the power to intervene with respect to, and sanction, the depositary

EFAMA would like to underline that the questions related to the equivalence of the prudential regulation and supervision in third countries are less pressing than other matters covered in this Call for Evidence. Indeed, this issue is directly related to third country provisions (passport for non‐EU AIFM and non‐EU AIF) which will only be implemented 3 years after the entry into force of the AIFMD. Taking into account the need for prioritization and sequencing of advices to be given further to the mandate given by the Commission, we therefore recommend ESMA to start by focusing on the most pressing matters and to address the issue of equivalence at a later stage, together with other third country provisions. This being said, EFAMA considers that carefully drafted equivalence provisions for third country depositaries will be crucial to secure a similar level of investor protection, whether the AIF and its depositary are located within or outside the European Union. In this respect, we believe that the Commission’s mandate provides an appropriate framework and identifies the most important elements that will have to be taken into account in order to assess the equivalence and the effectiveness of third countries depositary regulations. As a matter of principle, we suggest that criteria for assessing equivalence for non‐EU depositaries should be as stringent as the provisions in Article 21 of the AIFMD concerning capital requirements and ongoing supervision.

III.3. Issue 13 – Depositary functions

ISSUE 13.1 – DEPOSITARY FUNCTIONS PURSUANT TO PARAGRAPH 6

1. CESR is requested to advise the Commission on the conditions for performing the depositary

functions pursuant to Article 21(6). CESR is requested to specify conditions for the depositary to ensure that:

• the AIF's cash flows are properly monitored; • all payments made by or on behalf of investors upon the subscription of shares or units

of ‐ an AIF have been received and booked in one or more cash accounts opened in the name of the AIF or in the name of the AIFM acting on behalf of the AIF or in the name of the depositary acting on behalf of the AIF at an entity referred to in Article 18 (1) (a) to (c) of Commission Directive 2006/73/EC in accordance with the principles set forth in Article 16 of Commission Directive 2006/73/EC.

• where cash accounts are opened in the name of the depositary acting on behalf of the AIF, none of the depositary's own cash is kept in the same accounts.

In respect of the monitoring of cash flows, EFAMA would like to note that the huge volume of cash flows involved on a daily basis throughout the AIF industry makes it virtually impossible for depositaries to monitor every cash movement for every AIF. The obligation for depositaries to monitor cash flows should therefore essentially be construed as a requirement for the depositary to verify on an ongoing basis that appropriate procedures for the follow up of cash flows are in place, well documented and are effectively applied in daily practice (e.g. through an adequate sampling approach). Both these procedures and the verification of their effectiveness should be proportionate to the scale and operations of the AIF and the


AIFM. In respect of subscription monies and other cash assets belonging to the AIF, EFAMA strongly agrees with the principle, already contained in the text of the AIFMD itself, according to which cash assets belonging to the AIF should not be kept in the same accounts as cash belonging to the depositary.

2. CESR is requested to advise the Commission on the conditions applicable in order to assess whether:

• an entity can be considered to be of the same nature as the entity referred to in Article 18 (1) (a) to (c) of Commission Directive 2006/73/EC, in the relevant non‐EU market where opening cash accounts on behalf of the AIF are required;

• such an entity is subject to effective prudential regulation and supervision to the same effect as the provisions laid down in European Union law and which is effectively enforced.

At this stage of the discussion, EFAMA does not have detailed comments on this issue.

3. CESR is requested to advise the Commission on the conditions applicable in order to determine what shall be considered as the relevant market where cash accounts are required.

At this stage of the discussion, EFAMA does not have detailed comments on this issue.


1. CESR is requested to advise the Commission on:

• the type of financial instruments that shall be included in the scope of the depositary's custody duties as referred to in point (a) of Article 21(7), namely (i) the financial instruments that can be registered in a financial instruments account opened in the name of the AIF in the depositary’s books, and (ii) the financial instruments that can be "physically" delivered to the depositary;

• the conditions applicable to the depositary when exercising its safekeeping custody duties for such financial instruments, taking into account the specificities of the various types of financial instruments and where applicable their registration with a central depositary, including but not limited to:

o the conditions upon which such financial instruments shall be registered in a financial instruments accounts opened in the depositary’s books opened in the name of the AIF or, as the case may be, the AIFM acting on behalf of the AIF,;

o the conditions upon which such financial instruments shall be deemed (i) to be appropriately segregated in accordance with the principles set forth in Article 16

of Commission Directive 2006/73/EC9

), and (ii) to be clearly identified at all times as belonging to the AIF, in accordance with the applicable law; andwhat shall be considered as the applicable law.

EFAMA believes that the list of financial instruments that can be held in custody (i.e. financial instruments that can be registered in a financial instruments account) should in particular include transferable securities, money market instruments and units in collective investment undertakings, as defined in sub‐paragraphs (1) to (3) of Annex 1, Section C of MiFID Directive 2004/39/EC. Financial instruments that can be physically delivered to the depositary should essentially include financial


instruments that are in a certificated form and which are therefore capable of being delivered to the depositary in the form of a certificate that can be physically safe‐kept (in a vault) by the depositary (e.g. stock certificates, treasury bonds, …). In defining the scope of financial instruments that can be held in custody, ESMA should also take into account the upcoming Securities Law Directive in order to ensure consistency between both Directives. As regards the conditions upon which such financial instruments shall be deemed to be appropriately segregated, EFAMA believes that financial instruments belonging to the AIF must be fully segregated from financial instruments belonging to the depositary or to other entities involved down the custody chain and that the principle set forth in Article 16 of Directive 2004/39/EC provide an appropriate starting point to determine the operational standards applicable to the segregation of financial instruments by the depositary (see also our answer to Issue 15).

2. CESR is requested to advise the Commission on: a. the type of "other assets" with respect to which the depositary shall exercise its

safekeeping duties pursuant to paragraph 7(b), namely all assets that cannot or are not to be kept in custody by the depositary pursuant paragraph to Article 7(a);

b. the conditions applicable to the depositary when exercising its safekeeping duties over such "other assets", taking into account the specificities of the various types of asset, including but not limited to financial instruments issued in a 'nominative' form, financial instruments registered with an issuer or a registrar, other financial instruments and other types of assets.

EFAMA considers that the “other assets” in the sense of Article 21.7(b) of the Directive should be negatively defined as any asset belonging to the AIF and that does not answer the definition of financial instruments that can be held in custody within the meaning of Article 21.7(a) of the same Directive. These will typically include assets such as real estate, commodities, OTC derivatives, etc … However, in order to avoid any loophole in the regulation, the list of such “other assets” can only be illustrative (and therefore non‐exhaustive). We also want to stress our disagreement with the Commission’s implicit assumption according to which financial instruments registered with an issuer or a registrar should necessarily pertain to the category of other assets. For instance, units in collective investment undertakings are very often registered with a registrar. However, such units are definitely capable of being registered in a financial instruments account opened in the depositary’s books and should, therefore, be considered as financial instruments that can be held in custody in the sense of Article 21.7(a) of the AIFMD.

3. To that end, CESR is requested to advise the Commission on: • the conditions upon which the depositary shall verify the ownership of the AIF or the

AIFM on behalf of the AIF of such assets; • the information, documents and evidence upon which a depositary may rely in order to

be satisfied that the AIF or the AIFM on behalf of the AIF holds the ownership of such assets, and the means by which such information shall be made available to the depository;

• the conditions upon which the depositary shall maintain a record of these assets, including but not limited to the type of information to be recorded according to the various specificities of these assets; and the conditions upon which such records shall be kept updated.

EFAMA considers it crucial that depositaries (and other entities part of the custody chain) be provided with


sufficient legal and operational certainty in respect of their duty of verification of ownership of the “other assets”. Level 2 measures should provide clear principles, for example, in respect of the form of acceptable record‐keeping, the required frequency of updating records, the means by which necessary information shall be made available to the depositary and the sources of such information. In general terms, the degree to which the depositary must verify ownership should not be extended beyond what is reasonable for the depositary to achieve. In our opinion, it would also be helpful to adopt Level 3 guidelines providing practical examples of the information, documents and evidence upon which the depositary may rely by reference to each type of asset classes.

4. In its advice, CESR should also consider the circumstances where assets belonging to the AIF, are subject to temporary lending or repurchase arrangements or any type of arrangements under which financial instruments may be re‐used or provided as collateral by the AIF or AIFM on behalf of the AIF, whether or not such arrangements involve transfer of legal title to the financial instruments, and advise on the conditions applicable to the depositary to perform its safekeeping duties accordingly.

At this stage of the discussion, EFAMA Members do not have detailed comments on this issue.


1. CESR is requested to advise the Commission on the conditions the depositary must comply with

in order to fulfill its duties pursuant to Article 21(8). The advice shall include all necessary elements specifying the depositary control duties when inter alia verifying the compliance of instructions of the AIFM with the applicable national law or the AIF rules or instruments of incorporation, or when ensuring that the value of the shares or units of the AIF is calculated in accordance with the applicable national law and the AIF rules or instruments of incorporation and procedures laid down in Article 19.

At this stage of the discussion, EFAMA does not have detailed comments on the conditions the depositary should fulfill in the execution of its oversight functions.

III.4. Issue 14 – Due diligence

1. CESR is requested to advise the Commission on the duties the depositary has to carry out in exercising its due diligence duties pursuant to Article 21(10), namely:

• procedures for the selection and the appointment of any third party to whom it wants to delegate parts of its tasks; and

• procedures for the periodic review and ongoing monitoring of that third party and of the arrangements of that third party in respect of the matters delegated to it.

2. CESR is encouraged to develop a comprehensive template of evaluation, selection, review and monitoring criteria to be considered by the depositary while exercising its due diligence duties under Article 21(10).

EFAMA considers that the principles set forth in Article 14 of Commission Directive 2006/73/EC (Conditions for outsourcing critical or important operational functions or investment services or activities) would provide a good starting point for the definition of the due diligence duties of the depositary in the selection


and appointment of a sub‐custodian, subject to appropriate adaptations. We also believe that the selection and ongoing monitoring of sub‐custodians should be duly documented and based on clear procedures reflecting existing international standards. These procedures should be accepted by the delegates and might also form part of the custodian activity program approved by the depositary’s supervisory authority. They might include: conducting an analysis of custody risks associated with the placement of assets with a sub‐custodian entity;

monitoring the custody risks associated with the maintenance of assets with a sub‐custodian entity on a continuous basis and promptly notifying the fund or AIFM of any material change in these risks;

ensuring that the sub‐custodian exercises reasonable care, prudence and diligence in the performance of its safekeeping duties; and

withdrawing assets from the sub‐custodian as soon as reasonably practicable if the sub‐custodian no longer meets the requirements of the Directive.

III.5. Issue 15 – The segregation obligation

1. CESR is requested to advise the Commission on criteria to be satisfied to comply with the

segregation obligation whereby the depositary shall ensure on an ongoing basis that the third party fulfils the conditions referred to in Article 21(10)(d)(iv).

Concerning the definition of the criteria the sub‐custodian should comply with to satisfy the condition of segregation of assets, EFAMA believes that any requirement should take into account the legal and operational realities in the way assets are currently held in the international custodian system. It should, in particular, take into consideration the fact that full segregation of assets on a client by client basis can be achieved at the level of the depositary (through designation of each individual clients (in this case AIFs) in the depositary’s books) but would be impossible to achieve in practice throughout the rest of the custody chain.

III.6. Issue 16 – Loss of financial instruments

1. CESR is requested to advise the Commission on the conditions and circumstances under which

financial instruments held in custody pursuant paragraph 7(a) shall be considered as "lost" according to Article 21(11). In its advice, CESR should take into account the various legal rights attached to the financial instruments depending, for example, on the legal concepts ('ius ad rem' vs. 'ius in personam') used in the jurisdiction where they have been issued and any legal restrictions applicable to the place where they are kept in (sub‐) custody.

2. In its advice, CESR should specify circumstances when such financial instrument should be

considered permanently “lost”, to be distinguished from circumstances when such financial instruments should be considered temporarily “unavailable” (held up or frozen). To that end, CESR shall consider inter alia the following circumstances:

• Insolvency of, and other administrative proceedings against, a sub‐custodian; • Legal or political changes in the country where financial instruments are held in sub

custody; • Actions of authorities imposing restrictions on securities markets; • Risks involved through the use of settlement systems; and • Any other circumstances which may prevent the AIF from using or disposing of its assets

that are kept in custody by a depositary or a sub custodian.


Issues 16, 17 and 18 of the Call for Evidence are strongly interconnected and are raising a number of very complex issues, with far‐reaching implications. In the limited timeframe granted by ESMA, it is not possible for EFAMA to provide detailed comments on these issues. Whatever option ESMA decides to investigate, we urge that it validates its thinking by a thorough consultation of all the stakeholders involved and that it checks its implication on other regulations, such as the upcoming Securities Law Directive.

III.7. Issue 17 ‐ External events beyond reasonable control

1. CESR is requested to advise the Commission on conditions and circumstances for events to be considered as: ‐external, ‐going beyond reasonable control, and ‐having consequences which would have been unavoidable despite all reasonable efforts to the contrary.

2. If possible, CESR is requested to advise the Commission on a non‐exhaustive list of events where

the loss of assets can be considered to be a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. CESR is encouraged to consider the appropriate form (e.g. guidelines) of such a list.


III.8. Issue 18 – Objective reason to contract a discharge

1. CESR is requested to advise the Commission on the conditions and circumstances under which

there is an objective reason for the depositary to contract a discharge pursuant to Article 21(12).

2. In its advice, CESR is encouraged to provide an indicative list of scenarios that are to be considered as being objective reasons for the contractual discharge referred to in Article 21 (12).



IV. Part III: Transparency Requirements and Leverage IV.1. Issue 19 ‐ Article 4 Definition of leverage

1. CESR is requested to provide the Commission with a description of relevant methods by which

AIFM increase the exposure of AIF whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means, including any financial and/or legal structures involving third parties controlled by the AIF. This description or mapping should distinguish between the various business models and approaches to leverage in the AIFM industry. In its advice, CESR should take into account the guidance provided in recital 14.

2. CESR is requested to advise the Commission on the appropriate method or methods for the

calculation of leverage for the purpose of this Directive. The analysis should, inter alia, take into account the appropriateness, accuracy, cost, comparability and practicability of the different methods.

EFAMA wishes to underline that there are different AIF strategies which employ different types of leverage. Leverage can take multiple forms and can origin from various sources (use of derivative instruments, use of borrowing, use of repo, use of Prime Broker, etc.). It is important to recognize that no universal definition of leverage exist. Leverage must be taken in the context of underlying securities as well as other risk metrics, in understanding the overall riskiness of an investment vehicle. It is problematic for regulators to govern risk in a prescriptive manner. The exact definition and calculation of leverage metrics often vary from manager to manager and not all leverage is created equal. In its advice on a description of relevant methods of leverage and on the appropriate method or methods for the calculation of leverage, ESMA should take these variations into account. A clear and meaningful method for the calculation of leverage is required, but it has proved difficult to identify one methodology that is appropriate across all types of vehicles. Some EFAMA Members referred to the ‘CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS, July 2010. They believe that those general principles applying to UCITS (i.e. using VaR and other methods identified by CESR for UCITS funds) should also be applied to AIFs at least if they are created UCITS‐like. Other EFAMA Members pointed out that the methodology proposed by CESR for the UCITS calculation was criticised by most of the respondents to its consultation. They were of the opinion that the method proposed and subsequently adopted by CESR is inconsistent with the UCITS commitment approach calculation and does not provide investors with a meaningful indicator of leverage. Other than for the most simple of AIF, the sum of notionals will not be a meaningful risk measure. It does not take into account, for example, derivatives used for hedging. Therefore, it is important that ESMA does not simply apply to AIF its guidance for UCITS. The methodology for AIF needs to allow for more sophisticated strategies.


IV.2. Issue 20 ‐ Article 22 Annual report As a general comment regarding Issues 20 & 21, EFAMA suggests to bear in mind the obligations contained in the UCITS Directive, when drafting the obligations in the AIFMD. Many of the points on which ESMA’s advice is requested are a matter for accounting standards. Concerning content and format of annual reports to be prepared for each AIF, EFAMA strongly suggests taking account of rules currently in place internationally and nationally for the asset class and fund type affected. Furthermore, given the future inclusion of non EU AIF it is important to ensure that the format of annual reporting requirements is not so tightly drawn as to constitute an effective barrier to entry to the EU while respecting investors’ legitimate expectation to obtain appropriate disclosures.

1. CESR is requested to advise the Commission on the content and format of the annual report. In its advice, CESR should consider whether all or any of the information referred to in Article 23 should be included in the annual report and the need for appropriate explanatory notes.

As a general comment, EFAMA believes that the requirements in the AIFMD should be as far as possible aligned to those of the UCITS Directive and that annual reports for AIFs should have a similar content and format to annual reports for UCITS. EFAMA considers that all significant assets that are illiquid should be disclosed separately (for investments > to 1%), specifying if it has been segregated in a Side Pocket and detailing the nature of its illiquidity and delay of potential liquidation. Regarding new arrangements for managing the liquidity of the AIF, such unaudited information could be mentioned as part of the investment policy or in the comments on the Side pocket / illiquid investments. More specifically, they were of the opinion that the annual report should include if relevant and in agreement with the auditors, information on the writedowns on remaining assets in the portfolio that may be justified (beyond a mere statement on potential side pockets or gates), as well as the percentage assets in the portfolio that are illiquid, written down or side pocketed.

2. CESR is requested to advise the Commission on the content and the format of a balance‐sheet or a statement of assets and liabilities. In its advice, CESR should specify in particular:

• the appropriate presentation, elements and level of detail of the AIF's assets;

• the appropriate presentation, elements and level of detail of the AIF's liabilities;

• the appropriate presentation, the elements and level of detail of net assets (shareholders' or unit holders' equity); and

• the statement of cash inflows to and outflows from the AIF. EFAMA suggests that the elements and level of details for the assets, liabilities, net assets (shareholders’ equity) and cash inflows and outflows that should show in the AIF annual report should include all significant assets and liabilities as separate line items. Total net assets should be disclosed with the breakdown of the net asset value per share (for a unitised fund). Significant line items for an AIF usually include investments (long and short shown separate), receivables/payables, cash, unrealized on derivative contracts, and any other line items deemed significant. It is important to disclose assets and liabilities


gross so that the user can calculate the balance sheet leverage. Cash inflows and outflows should be disclosed by type (operating, investing, financing) to provide transparency to the user as to where the fund’s cash surplus or deficit comes from.

3. CESR is requested to advise the Commission on the content and format of an income and expenditure account for the financial year. In its advice, CESR should specify in particular the elements and the level of detail of AIF's income and expenditure accounts.

All significant income and expenditure accounts should be reported as separate line items in such a way that the AIF discloses the total net investment income or loss. Significant line items for an AIF usually include interest/dividends, management and performance fees, and professional fees. In addition, realised gains and losses for the year and unrealized gains and losses at the annual report date should be included as separate disclosures.

4. CESR is requested to advise the Commission on the content and format of the report on the

activities of the financial year. In its advice, CESR should consider specifying inter alia:

• statement explaining how the fund has invested its assets during the relevant period in accordance with its published investment policy;

• overview of the AIF's portfolio and, where appropriate, the AIF's major investments;

• financial results; and

• directors' and corporate governance report depending on the legal structure of the AIF. An annual report should include a disclosure explaining the type of investments that the fund is allowed to make during the year in accordance with its investment policy, and the purpose and risks associated with each investment type. A schedule of investments should be included in the financial statements which summarises the types of investments held, at fair value. Any significant investments (usually over 5‐10%) should be disclosed as a separate line item, at fair value. Financial results should be disclosed in the financial statement to provide investors with objective data regarding the results of the AIF’s operations and significant ratios as a measure to compare them with the results of other AIFs. In general, the financial results should include share information, total return, and expense ratios. Usually, information in the directors and corporate governance report is unaudited, however it can prove useful to investors. Regardless of the directors’ and governance report, the legal structure of the fund should be disclosed in the footnotes of the financial statements.

5. CESR is requested to advise the Commission on how material changes in the information listed in Article 23 during the financial year covered by the report should be best presented in the annual report.

6. CESR is requested to advise the Commission on the content and the format of the remuneration disclosure required under points (e) and (f) of Article 22(2) including the details on the form of


remuneration. Given that staff salaries are not paid by the AIF, a breakdown in the annual report of the AIF between fixed and variable remuneration paid by the AIFM to its staff does not seem relevant for investors. However, management fee and performance fees that are paid to the AIFM could be disclosed in the annual report. IV.3. Issue 21 ‐ Article 23 Disclosure to investors

EFAMA wishes to remind ESMA that investors in many AIFs are professionals that will not require as much predetermined detail as investors in UCITS who are mainly retail investors. Professional investors will each of them require particular information they deem necessary for their investment. Consequently, the requirements applying to AIFs should be tailored with enough flexibility to allow for AIFs for professional investors to take into account the needs of professional investors and not be as burdensome/ carved in stone as those applying to UCITS. Should a Member State permit the marketing of AIF to retail investors in its territory, it will impose further requirements which will be imposed at national level and therefore should not have an impact to the implementing measures of the AIFMD. Furthermore, ESMA should in this context also consider that many closed‐ended funds are listed and are subject the requirements of the Prospectus Directive as well as the existing reporting requirements of the relevant listing authorities. Lastly a clear distinction should be made between disclosure requirements in the initial offering documentation of an AIF and financial and accounting details to be included in an AIF’s annual report and accounts. It should be part of the AIFM’s ongoing duties to investors to decide when significant changes to the AIF’s risk, liquidity or investment profile require additional disclosure to investors and/or updating of the offering documentation of the AIF.

1. With respect to the disclosure obligations in Article 23(4), CESR is requested to advise the Commission on:

• the appropriate frequency of such disclosures;

• the criteria for assessing the liquidity of assets and procedure for calculating the percentage referred to in Article 23(4)(a) and the format of such disclosures; the information and the essential elements to be included in the description of the arrangements referred in points a) and b) of Article 23(4) including the use of gates, suspensions and side pockets; the essential information, and the format thereof, of the risk factors, including relevant risk measures and metrics used to assess the sensitivity of the AIF portfolio to movements in interest rates, credit spreads, equity markets, etc, counterparty risks the extent of rehypothecation and information on indebtedness of entities controlled by the AIF to be disclosed by the AIFM to enable appropriate description of the current risk profile of the AIF; and

• the information and the essential elements to be disclosed by the AIFM to enable appropriate description of the risk management systems employed by the AIFM to manage these risks including results of recent stress tests.


EFAMA believes that it will be difficult to develop universally applicable criteria for assessing liquidity of assets. Liquidity as a measure depends on multiple complexly interrelated factors and might change quite radically over time. As regards appropriate frequency of disclosure, EFAMA suggests annual disclosures. For the majority of AIF, the appropriate frequency of the periodic disclosures set out in this provision will be annual, and operationally it may be easiest to make such disclosures at the same time as publication of the annual report. One‐off disclosures within an annual cycle might be appropriate where there are significant changes to an AIF’s risk profile or the risk management system of the AIFM that would warrant specific and additional disclosure to investors above and beyond what is in the AIF’s documents and the last annual report or disclosure. In such cases, the reasonable expectation of the investors should be the basis for the disclosure requirement. An example could be the reference within the Market Abuse Directive to what a reasonable person would wish or be expected to know. In relation to Article 23(4)(a), if it is clear from the outset that the AIF invests in illiquid assets and investors have been made aware of the potential impact of such holdings upon their ability to redeem some of or all of their investment, this should be reflected in the frequency of the disclosure. In most cases, it could still be argued that, absent significant changes, it will be still be appropriate and sufficient to make disclosures only annually. Disclosure of leverage should be made on an annual basis as part of the annual report and accounts. EFAMA suggests that CESR provide some standard measurements for disclosing leverage (such as gross leverage, net leverage and ex post volatility) to allow for easy compassion of different AIFs by investors. The decision regarding frequency of disclosures more than annually should be a matter for the AIFM, based upon the nature of the AIF and investors’ reasonable expectations given existing documentation and disclosures. Whatever the nature of the regulatory requirements, commercial factors may lead particular AIF to disclose certain matters more frequently. Also, it needs to be borne in mind that some AIF will be subject to disclosures under other European law, such as the Prospectus Directive, or for listed AIF the requirements of the relevant exchange. The format of the disclosures should be left to the AIFM, subject to a general requirement that they be clear, fair and not misleading. The AIFM should set out its investment and risk management approach in the AIF’s offering documents such as a summary of the risk framework. Level 2 measures could make reference to this judgment being based upon the risks set out in the fund prospectus. It should be for the AIFM to decide how best to disclose the risk management systems it employs to manage these risks, subject to a general requirement that such disclosures are clear. Investors in many AIFs require ongoing reporting on a number of issues such a volatility, performance and leverage. Given there is no one single measure which can be applied across all AIF, this will very much reflect the AIF’s strategy and liquidity.


2. With respect to the disclosure obligations in Article 23(5), CESR is requested to advise the Commission on:

• the appropriate frequency of such disclosures;

• the essential information, and the format thereof, to ensure an appropriate description of changes to the maximum level of leverage which the AIFM may employ on behalf of the AIF as well as any right of re‐use of collateral or any guarantee granted under the leveraging arrangement; and

• the leverage measures or ratios, and the format thereof, to be used by the AIFM when disclosing the total amount of leverage employed by the AIF during the reporting period and at the end of the reporting period including those specified according to Article 4.

Once again, annual disclosure of information on leverage appears sufficient. IV.4. Issue 22 ‐ Article 24 Reporting obligations to competent authorities

1. CESR is requested to advise the Commission for the purposes of paragraph 4 on the criteria to be

used to determine under which conditions leverage is to be considered as being 'employed on a substantial basis'.

For AIF holding real estate, it should be taken into account that in most cases of borrowing only specific properties are treated as collateral (e.g. by means of land charge or mortgage agreement) and no recourse to the fund as such is possible. In these cases, due to the considerably limited risk of loss to the entire portfolio, the threshold for substantial leverage should be set accordingly high.

2. CESR is requested to advise the Commission on the content of the obligations to report and provide information referred to in paragraphs 1 through 5. In its advice, CESR should

EFAMA believes that it is in this area that the use of Regulation (rather than Directive) would be beneficial to all parties. They share the Commission’s view that there is a need for the requirements to be sufficiently adjusted or tailored to the different business models and legal forms of the AIFM. They should also take into account the differences between the products managed or marketed by such AIFM.

3. consider developing a comprehensive template to be used by AIFM for reporting to competent

authorities the information required under Article 24. In developing such a template, CESR should take into account the reporting template issued by IOSCO on 25 February 2010 for reporting from hedge funds and templates used by national competent authorities. CESR should address inter alia the following elements:

• Assets under management

• Performance and investor information

• Market and product exposure (long and short positions)

• Regional focus

• Turnover and number of transactions, indication of markets in which trading can represent a significant proportion of overall volume, trading and clearing mechanisms

• Leverage and risk


• Asset and liability information

• Counterparty risk

The template should be sufficiently flexible to accommodate the different types, sizes and investment strategies of AIFM, without compromising the objective of effective supervision.

In the general introduction to Part III on Transparency Requirements and Leverage, the Commission suggests that ESMA should address the transparency requirements with an appropriate level of detail and harmonization taking into account, among other, the principle of proportionality and the need to minimize for any given transparency requirement the administrative burden for AIF, AIFM, competent authorities and other stakeholders concerned. In particular when developing a template for reporting to competent authorities, EFAMA invites ESMA to take in into account the need to minimize the administrative burden and therefore to pay due attention to the need of keeping the corresponding operational efforts at a reasonable level. The specific items for reporting should not be assumed to have the same relevance for all types of AIF ‐ as regards AIF investing in real estate, for instance, counterparty risk is mostly negligible. In any case, parties to rental agreements over the properties held in the fund portfolio must not be considered for the purpose of establishing counterparty risk. EFAMA welcomes the Commission’s reference to the IOSCO template for reporting by hedge funds, but urge that the advice provided in relation to this request (and to all other Commission’s requests) recognise that the AIFMD captures a very wide range of investment vehicles, only one subset of which might be described as hedge funds. A template should not contain a list of items which would render it unnecessarily burdensome for the majority of AIF or the national regulators who must analyse the information in order to meet their co‐operation obligations.

4. CESR is requested to advise the Commission on:

a. the appropriate frequency of such reporting as a function of the potential risks posed by specific types of AIFM;

b. the modalities and forms for data transmission; c. and whether the same conditions should apply to the additional information

requirements referred to in Article 24(5).

Regarding the appropriate frequency of reporting (question 4 a), EFAMA suggests that regular reporting to the authorities should be required annually, with further information available ad‐hoc on request. Moreover, given the sheer volume of reports that investors, the industry, national regulators and ESMA will receive going forward, it seems reasonable that requirements should be based initially on annual reports and reviewed once all parties have some experience of how the Directive provisions are operating more generally. This is again in line with the invitation by the Commission to ESMA mentioned in the general introduction to Part III on Transparency Requirements and Leverage to bear in mind the need to minimize for any given transparency requirement the administrative burden for AIF, AIFM, competent authorities and other stakeholders concerned.


As regards the modalities and forms for data transmission (question 4b), EFAMA suggests to leave them, at least initially, to the discretion of national regulators. National regulators will already have their own reporting mechanisms which firms and entities within that jurisdiction will be used to operating. In respect of question 4c) EFAMA suggests to await the general requirements regarding reporting. Only then can there be a sensible and informed debate about how to deal with special situations. In the meantime, should such a situation arise, it is already within national regulators’ powers to seek such additional information and many national regulators will already have their procedures in this regard.

IV.5. Issue 23 ‐ Article 25 Use of information by competent authorities, supervisory cooperation and limits to leverage

1. CESR is requested to advise the Commission on the principles specifying the circumstances in which competent authorities shall exercise the powers granted pursuant to Article 25(3), taking into account different strategies of AIF, different market conditions in which AIF operate and possible pro‐cyclical effects following from exercising the provisions. Such principles should guide competent authorities in identifying situations and circumstances in which competent authorities shall exercise the powers referred to in paragraph 3.

EFAMA would like to remind ESMA that competent authorities may impose limits to the leverage used by an AIFM in exceptional circumstances only, which implies an important systemic risk and that in any case such limitations should only apply on a series of criteria such as size of market participants, their strategies and their special situation.

2. In its advice, CESR should consider inter alia to what extent the following aspects might endanger the stability and integrity of the financial system:

• leverage used in different strategies and the size of an AIF's "footprints";

• the concentration of risks in particular markets and risks of spill‐over effects; liquidity issues in particular markets; counterparty risks to credit institutions or other systemically relevant institutions; the scale of any asset/liability mismatch; and

• the evolution of prices of assets with respect to their fundamentals. 3. CESR is also requested to advise on the the appropriate timing of potential measures referred to

in Article 25(3).

EFAMA underlines that the intervention powers pursuant to Article 25(3) should be deemed contingency measures and thus, should be permitted only in very limited circumstances. In order to ensure consistent application throughout the EU, EFAMA suggests that ESMA should develop clear‐cut restrictive criteria for the exercise of these powers and engage in continuous exchange of views on the subject matter in order to fulfill the coordination and facilitation role assigned to it by Article 25(5). Since the relevant provisions are aimed at hedge funds that employ high levels of leverage, we suggest that ESMA’s advice be cognisant of IOSCO’s principles for hedge funds. It should also recognise the fact that not all “hedge funds” are highly leveraged and that leveraged funds were not the cause of the credit crisis;


the leverage of banks’ balance sheets was the prime factor. Furthermore, one area of particular systemic concern – OTC derivatives – is being addressed by another piece of European legislation, “EMIR”. Whatever measures regulators collectively believe are necessary and that national regulators believe need to be enacted in specific circumstances, we urge ESMA to recognise in its advice that an AIF employing a higher level of leverage cannot simply reduce that overnight without causing considerable damage to investors’ interests. In large part, we believe the issue is best dealt with by full disclosures and well‐enforced requirements on the management of conflicts of interest and on appropriate systems and controls within the AIFM.


V. Part IV: Supervision Regarding cooperation arrangements and exchange of information between competent authorities, EFAMA believes that the mechanisms applying to AIFMD should be similar to those applying to the UCITS Directive, unless a differentiation is duly justified by the specific nature of AIFs. EFAMA considers that the requirements of AIFMD Level 2 should not be higher than those of the UCITS Directive, as the AIF passports only apply for marketing to professional investors. The AIFMD does not provide a passport for marketing to retail investors. Professional investors are more educated than retail investors, and may take their own assessments in a better way than retail investors. EFAMA agrees with general comment by the Commission in the Issue 24 – Cooperation arrangements between European competent authorities and authorities of Third Countries that the Level 2 measures relating to passports for non‐EU AIFM and non‐EU AIFs are not as pressing as other matters and could be dealt with concluded at a later stage since the passporting regime will only be operational by 2015. Issue 24a ‐ Cooperation arrangements between European competent authorities and the authorities of third countries required by Articles 34(1), 36(1) and 40(1) AIFMD

1. CESR is requested to advise the Commission on a common framework to facilitate the

establishment of the cooperation arrangements with supervisory authorities from third countries in the different situations described above. CESR is requested to advise on the objectives, the parties and the scope of the cooperation arrangements. In relation to the arrangements for the purpose of systemic risk oversight referred to in Articles 36(1) and 40(1), they should cover, at least, the minimum information related to the potential systemic consequences of non‐EU AIFM activity that competent authorities should exchange with their non‐European counterparts, the procedure for the exchange of that information and the frequency of the exchange. CESR is encouraged to consider as a framework the reporting obligations laid down in Article 24 AIFMD.

EFAMA is concerned regarding the Commission’s suggestion that ESMA’s advice should consider as a framework the reporting obligations laid down in Article 24. The concerns regarding these reporting obligations are that they are overly detailed as a basis for national regulators to correspond with non‐EU counterparts. The invitation by the Commission to ESMA mentioned in the general introduction to Part III on Transparency Requirements and Leverage to bear in mind the need to minimize for any given transparency requirement the administrative burden for AIF, AIFM, competent authorities and other stakeholders concerned should also apply in this case.

2. CESR should take into account that, due to the non‐binding nature of the administrative

arrangements, they should have a limited scope (i.e. cannot create legal obligations), since they cannot be considered as international treaties.


EFAMA believes that the fact that such arrangements will be non‐binding is a further argument that they should not be overly burdensome.

3. CESR is encouraged to take into account the relevant international standards in this regard, in particular, the principles and standards related to the control of the potential systemic risk posed by AIFM of the International Organisation of Securities Commissions (IOSCO).

EFAMA fully supports that any recommendations or advice should take into account relevant IOSCO principles and standards, in particular IOSCO’s “Principles Regarding Cross‐Border Supervisory Cooperation” (May 2010). EFAMA would like to mention that the IOSCO Principles provide helpful guidance on the mechanics of such cooperation arrangements, in particular, on the use of a standard form of supervisory memoranda of understanding between regulators and the use of “standing committee networks” for consultation in identifying, assessing, and where appropriate, addressing emerging regulatory issues and risks that may have material cross‐border implications in areas of relevance to Directive. This being said, ESMA should bear in mind that these IOSCO principles and standards may in part be relevant only for certain types of AIF. EFAMA also strongly recommends the publication on a central public database of details of these cooperation agreements to allow easy identification by AIFM of relevant jurisdictions. Issue 24b ‐ Cooperation arrangements between European competent authorities and the authorities of third countries required by Articles 35(2), 37(7)(d) and 39(2)(a) of AIFMD Concerning this second group of cooperation arrangements, EFAMA agrees with general comment by the Commission that the Level 2 measures could be concluded at a later stage since the passporting regime will only be operational by 2015.

1. CESR is requested to advise the Commission on a common framework to facilitate the establishment of cooperation arrangements with supervisory authorities from third countries in the different situations described above. CESR is requested to advise on the objectives, the parties and the scope of the cooperation arrangements. These arrangements should cover: a) the modalities and conditions for the supervision of non‐EU AIFM and funds and b) the procedures for the exchange of information between the authorities involved.

The aim of these cooperation arrangements should be to ensure the efficient cooperation between supervisors and the effective supervision of the third country AIFM and/or AIF.

EFAMA would like to emphazise that the reporting obligations should not be overly detailed. The invitation by the Commission to ESMA mentioned in the general introduction to Part III on Transparency Requirements and Leverage to bear in mind the need to minimize for any given transparency requirement


the administrative burden for AIF, AIFM, competent authorities and other stakeholders concerned should also apply in this case.

2. CESR should take into account that due to the non‐binding nature of the administrative arrangements they should have a limited scope (i.e. cannot create legal obligations), since they cannot be considered as international treaties.

EFAMA believes that the fact that such arrangements will be non‐binding is a further argument that they should not be overly burdensome.

3. CESR is encouraged to take into account the international standards in this regard, in particular, the principles regarding cross‐border supervisory cooperation of the International Organisation of Securities Commissions (IOSCO).

EFAMA fully supports that any recommendations or advice should take into account relevant IOSCO principles and standards, in particular IOSCO’s “Principles Regarding Cross‐Border Supervisory Cooperation” (May 2010). EFAMA is of the opjnion that the IOSCO Principles provide helpful guidance on the mechanics of such cooperation arrangements, in particular, on the use of a standard form of supervisory memoranda of understanding between regulators and the use of “standing committee networks” for consultation in identifying, assessing, and where appropriate, addressing emerging regulatory issues and risks that may have material cross‐border implications in areas of relevance to Directive. This being said, ESMA should bear in mind that these IOSCO principles and standards may in part be relevant only for certain types of AIF. EFAMA also strongly recommends the publication on a central public database of details of these cooperation agreements to allow easy identification by AIFM of relevant jurisdictions. V.2. Issue 25: Cooperation and exchange of information between competent authorities

1. CESR is requested to advise the Commission on the content of the level 2 measures on the

exchange of information on the potential systemic consequences of AIFM activity. In particular CESR is requested to advise on what type of information could be exchanged among supervisors in order to facilitate supervisory cooperation in identifying potential systemic risks and risks to the orderly functioning of markets posed by AIFM individually or collectively, taking into account the reporting requirements on AIFM pursuant to Article 24.

2. CESR is requested to advise the Commission on a template, a data format, and the conditions of secured data transmission for the exchange of data among competent authorities. CESR is also requested to advise on the periodicity of the exchange of the information.

EFAMA would welcome Level 2 measures in form of regulation rather than directive in this context.


V.3. Issue 26: Authorisation of non‐EU AIFM

1. CESR is requested to advise the Commission on the procedure to be followed by Member States

when determining the Member State of reference in cases where there are several possible Member States of reference. This advice should discuss a number of alternatives. It should take the following aspects into account: legal certainty, risk of regulatory arbitrage and potential impact/costs on the AIFM, the investors in the AIF it manages, and the competent authorities involved.

Since the passport for non‐EU AIF and AIFM does not come into effect from the outset, EFAMA Members suggest to provide advice on these procedures at a later stage. In this context EFAMA would appreciate clarification in cases where a third country AIFM is an affiliate entity of a group with a pre‐existing presence in the EU. Simply relying on the jurisdiction where the third country AIFM intends to conduct the majority of its marketing may not provide the optimal regulatory outcome in terms of supervision if the regulator in that jurisdiction is not the main supervisor for the group as a whole in the EU. Where the third country AIFM’s group has a main supervisor in the EU, EFAMA strongly recommends appropriate involvement of the main supervisor who will have an in depth knowledge of the group’s risk management and governance structure. [11‐4006]

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