The European Securities and Markets Authority (ESMA) has updated the AIFMD FAQs. The following question have been updated:

Section III: Reporting to national competent authorities under Articles 3, 24 and 42

Question 84: Which risk is measured by NET DV01? How should it be reported?

Answer 84: Net DV01 should be the value change in price (value) of a portfolio and measures the portfolio’s sensitivity to a change in the yield curve. Assume an increase of 1bp in the risk-free rate curve (assume a parallel shift) at the end of the reporting period. The effect on the total net asset value of the AIF (taking into account all the positions (including derivative positions) of the portfolio) should be reported as a monetary value in base currency for each maturity bucket (< 5 years, 5-15 years and >15 years) as specified in data fields 140-142. Report: (i) a negative value if the variation of the net asset value is negative; (ii) a positive value if the variation is positive and (iii) a zero if the AIF is neutral or not exposed at all to this risk. In case a measure of risk is not applicable for an AIF or when AIFM report a zero value, the reasons should be explained in the „Risk Measure Description” (data field 147). As indicated in the Guidelines, DV01 is defined as in ISDA definition.

For example, assume an AIF with NAV of 100M EUR encountering the following portfolio decline after a general increase of 1bp in the risk-free yield curve: 0.01%, decline for maturity bucket <5 years, 0.02% decline for maturity bucket 5-15 years and 0.03% decline for maturity bucket >15 years. Then for these maturity buckets it should report, in base currency, respectively: “-10000”, “-20000” and “-30000”.

Question 85: Which risk is measured by NET CS01? How should it be reported?

Answer 85: Net CS01 measures the portfolio’s sensitivity to a change in credit spreads. Assume a general increase in all credit spreads of 1bp at the end of the reporting period. The effect on the total net asset value of the AIF (taking into account all the positions (including derivative positions) of the portfolio) should be reported as a monetary value in base currency for each maturity bucket (< 5 years, 5-15 years and >15 years) as specified in data fields 140-142. Report: (i) a negative value if the variation of the net asset value is negative; (ii) a positive value if the variation is positive and (iii) a zero if the AIF is neutral or not exposed at all to this risk. In case a measure of risk is not applicable for an AIF or when AIFM report a zero value, the reasons should be explained in the “Risk Measure Description” (data field 147). As indicated in the Guidelines, CS01 is defined as in ISDA definition.

For example, assume an AIF with NAV of 100M EUR encountering the following portfolio decline after a general increase of 1bp in all credit spreads: 0.01%, decline for maturity bucket <5 years, 0.02% decline for maturity bucket 5-15 years and 0.03% decline for maturity bucket >15 years. Then for these maturity buckets it should report, in base currency, respectively: “- 10000”, “-20000” and “-30000”.

Question 86: Which risk is measured by Net Equity Delta? How should it be reported?

Answer 86: Net equity delta is used to analyse portfolio’s sensitivity to movements in equity prices. Assume all equity prices the AIF is exposed to decline by 1% at the end of the reporting period. Report the effect on the total net asset value of the AIF (taking into account all the positions (including derivative positions) of the portfolio) as a monetary value in base currency. In the case of derivative positions, a decline of 1% in the value of the underlying should be considered, and not in the value of the derivative. Hence, it should report: (i) a negative value if the variation of the net asset value is negative; (ii) a positive value if the variation is positive and (iii) a zero if the AIF is neutral or not exposed at all to this risk. In case a measure of risk is not applicable for an AIF or when AIFM report a zero value, the reasons should be explained in the “Risk Measure Description” (data field 147).

Example:

  1. Assume at the quarter-end that the NAV sensitivity of an AIF to a 1% equity price decline is -0.5% and that its NAV is 100M EUR, then the figure to be reported under the field “net equity delta” would be “-500000”.
  2. Assume the AIF is fully exposed to fixed-income instruments, then a zero would be reported under the field “net equity delta” and “Not applicable given AIF’s predominant type” would be reported in the Risk Measure Description field (147).

Section XV: ESMA’s guidelines on performance fees in UCITS and certain types of AIFs

Question 4: Are registered AIFMs referred to in Article 3(2) of the AIFMD subject to ESMA’s Guidelines on performance fees while marketing to retail investors units or shares of AIFs they manage?

Answer 4: The Guidelines on performance fees do not apply to registered AIFMs referred to in Article 3(2) of the AIFMD. Such registered AIFMs are only subject to the requirements referred to in that Article, which are outside the scope of the Guidelines. However, Member States may decide to impose stricter requirements on registered AIFMs and to allow them to market AIFs to retail investors in their territory, in accordance with Articles 3(3) and 43(1) of the AIFMD. In such cases, National Competent Authorities may also decide to apply the Guidelines to registered AIFMs.

Question 5: Based on paragraph 4026 of the Guidelines on performance fees, how should the performance reference period27 for the benchmark model28 be set?

Answer 5:

Paragraph 40) of the guidelines recommends that:

  1. any underperformance of the fund compared to the benchmark index should be clawed back before any performance fee becomes payable; and
  2. the length of the performance reference period, if this is shorter than the whole life of the fund, should be set equal to at least 5 years.

In order to comply with the above recommendations, it should be ensured that any underperformance is brought forward for a minimum period of 5 years before a performance fee becomes payable, i.e. fund managers should look back at the past 5 years for the purpose of compensating underperformances.

In case the fund has overperformed the benchmark index, the fund manager should be able to crystallise performance fees.

Question 6: How should the performance reference period31 be set in case of a merger where the receiving AIF is a newly established fund with no performance history and it is in effect a continuation of the merging AIF?

Answer 6: In order to ensure that the merger is not conducted with the aim of resetting the performance reference period, in the case of a merger where the receiving AIF is a newly established fund with no performance history and the competent authority of the receiving AIF assesses that the merger does not substantially change the AIF’s investment policy, the performance reference period of the merging AIF should continue applying in the receiving AIF.

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