On 27 March 2020, the European Securities and Markets Authority (ESMA), the EU securities regulator, launched a public consultation on its draft guidance to address leverage risks in the Alternative Investment Fund (AIF) sector.

In its draft guidance, ESMA notifies that due to the rapid expansion of the investment fund sector and the higher risk-taking, in a context of low interest rates, it is of utmost importance to implement a framework for National Competent Authorities (NCAs) to monitor the level of leverage and deleveraging process of highly leveraged alternative investment funds.

The consultation is part of the ESMA response to the recommendations of the European Systemic Risk Board in April 2018 to address liquidity and leverage risk in investment funds.

It is acknowledged that funds not using leverage may also pose risks to financial stability.

ESMA will consider all comments received by 1 September 2020.

ESMA’s press release can be found here.

ESMA’s consultation on Guidelines can be found here.