The European Exoskeleton Exercise: ESMA consults on AIFMD Level 2 measures

After countless drafts, the Alternative Investment Fund Managers Directive (“AIFMD” or “the Directive”) was published in the Official Journal of the European Union (“EU”) on 1 July 2011 and came “into force” on 21 July 2011. However, rather than this represent an actual implementation date, the AIFMD process  has only reached the halfway stage (if even that).

The AIFMD, as it stands now, is a “framework directive” Level 1, to which the detail needs to be added when devised.  In reality, uncertainty remains as to the eventual substance of many of the Directives most critical, and controversial, measures.

In December 2010, the newly formed European Securities and Markets Authority (“ESMA”) (an independent authority established by the EU with the role of safeguarding the stability of its financial system), received a request from the European Commission to assist with the content of the “Level 2” implementing measures of the AIFMD, essentially the flesh on the bones of the Directive itself.

On 13 July 2011, ESMA published a 436 page long consultation paper setting out draft advice on most of the issues it had been requested to provide advice on - with the notable exception of supervision and “third” (i.e. non-EEA) country provisions, both of which are the subject of a separate consultation published subsequently. It is worth noting that at a time when ESMA’s proposed advice is out for consultation, that the European Commission is not even obliged to follow it and may ultimately produce quite different provisions. However, this would be quite a shocking turn of events and the consultation paper certainly gives the industry the best insight yet into the likely measures to be introduced by the Directive and how the rulebooks may look for managers caught by it.

We have put together a high level overview of the main issues in ESMA’s July consultation on AIFMD Level 2 measures. The review gives a high level overview of the key areas set-out in the ESMA consultation paper, covering the topics first where new requirements are proposed which are additional to current regulatory requirements and as such, present the biggest challenge to firms. It then discusses areas in which increased formality is proposed in respect of matters to which most firms likely already attend to some degree, for example risk and liquidity management.  Finally, the overview concludes with an assessment of requirements that broadly match current FSA rules. Of particular note is the need for firms to be aware of the potential for increased costs as a result of higher capital adequacy requirements, increased formality of procedures in many areas and finally increased reporting requirements.

Please click here to access the IMS review.

The July consultation paper asks for feedback by 13^th September 2011, so ESMA can meet the 16^th November 2011 deadline in order that the European Commission may complete the official guidelines and implementing measures in the first half of 2012.  In 2012, the Financial Services Authority will consult on the necessary changes to its rulebook and final implementation of AIFMD in the UK and all other EU Member States is due by July 2013.

The next few years are shaping up to feature some of the most fundamental regulatory changes ever seen. These contemporaneous developments include changes to the UK regulatory structure, the increased reach of US regulation via Dodd Frank and increased EU intervention, for example, in relation to short selling and market infrastructure. Firms should now start thinking about factoring the cost of responding to an increasingly demanding regulatory regime into compliance budgets.

If you have any questions regarding this subject, please contact Peter Moore, Stephen Burke or Alan Leale-Green. Alternatively telephone 020 7408 2448 to speak to your usual IMS contact.