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As part of a pre-existing effort to address concerns about systemic risk, European securities regulators launched a consultation on proposed guidance to address leverage risks in the alternative investment fund sector.

The European Securities and Markets Authority (ESMA) issued a consultation paper that sets out draft guidance for addressing the build-up of leverage risks in alternative investment funds, and the financial system.

“In situations when financial markets are under severe stress, highly leveraged alternative investment funds can further amplify systemic risk,” said Steven Maijoor, ESMA chair.

The proposed guidance aims to ensure that local regulators are using common approaches in assessing how the use of leverage contributes to the build-up of systemic risk, and in how they design, calibrate and implement leverage limits.

It also seeks feedback on ESMA’s proposed principles for setting leverage limits.

“Considering the size of the investment fund sector, achieving supervisory convergence in [regulators’] approaches to monitoring and regulating the use of leverage by alternative investment funds is of the utmost importance,” Maijoor said.

“Our proposed guidelines address the assessment of leverage-related systemic risk and aim at ensuring that [regulators] adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met,” he added.

The consultation deadline is Sept. 1.