AXA Investment Managers (AXA IM) is glad to respond to the European Banking Authority’s consultation on the ‘draft EBA Guidelines on limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework under Article 395 para. 2 Regulation (EU) No. 575/2013’.
AXA IM is ranked in the top 20 asset management companies worldwide and is ranked in the top 5 EU-headquartered asset management companies.
AXA Investment Managers has 12 different locations across Europe, including several locations from where UCITS and/or Alternative Investment Funds (AIFs) are managed.
We have therefore developed a comprehensive experience in the management of investment funds, acting exclusively on behalf of clients (more than 10,000 clients for more than 1,700 funds and mandates).
It has to be stressed that the investment funds that we manage are regulated, either through pan-European rules or through national rules.
In addition, as an asset management company, we are ourselves regulated either by the UCITS Directive or by the AIFM Directive, which set the exhaustive framework of management of our funds.
We support the EBA for proposing that (p. 8 of the Consultation Paper) “shadow banking entities (…) [are] entities that: (…) are not within the scope of prudential consolidation nor subject to solo prudential requirements under specified EU legislation (…).”
We also support the EBA for making the point that (p. 9 of the Consultation Paper) “some funds are regulated pursuant to prudential frameworks similar to those applied to credit institutions and investment firms. In particular, in the EU the UCITS Directive (Directive 2009/65/EC) prescribes a robust set of requirements under which undertakings for collective investment in transferable securities, and their managers, operate. These include requirements on the asset manager (initial capital, own funds and internal control requirements) and the managed funds (e.g. limits to leverage and concentration)”.
However, we have three strong concerns and related solutions to suggest:
- On the first EBA statement above, we wish to get the explicit clarification that from an EU perspective, “the scope of prudential consolidation” is applicable at least both to entities which are within the scope of the Capital Requirement legislation as well as to entities which are within the scope of Solvency 2. These two sectorial legislations, respectively applicable to banking group entities and insurance group entities, are clearly based on a prudential approach and therefore this double exemption should be recognized by the EBA;
- On the second EBA statement above, we have two concerns:
o UCITS funds are proposed to be exempted by the EBA because the EBA considers that the relevant funds and their managers are appropriately regulated from a prudential perspective. But then we don’t understand why, conversely, Money Market Funds (MMFs) and their managers should be captured: a dedicated EU legislation is going to be definitively adopted on MMFs in the coming months, specifically to put them out of the scope of the shadow banking. It should be ensured that MMFs be put out of the scope of shadow banking as soon as they will comply with the forthcoming EU MMF Regulation;
o Regarding the AIFs:
It has first to be recalled that the AIFM Directive was launched in the aftermath of the 2008 financial crisis, more precisely after a G20 decision that hedge funds should be regulated everywhere in the world. Therefore the AIFM Directive introduced a regime for AIF managers which was explicitly aimed at tackling the systemic risk involved by them – and it led to a series of management restrictions and requirements (initial capital, own funds, internal control, transparency of governance and ownership, reporting, etc.), inspired by the UCITS Directive provisions and adapted to AIF managers;
Regarding AIFs (the funds) themselves, it has to be recalled that the European Commission – within the framework of the AIFM Directive - extended the scope of AIFs from hedge funds initially to all non-UCITS funds, as it is widely known that the EC had not the time to provide for a specific definition of hedge funds. From this huge widening of the AIF scope to all non-UCITS funds, it explains that today in practice the vast majority of AIFs in Europe are nationally regulated “UCITS-like funds” - which comply with a comprehensive set of rules very similar to the one of the UCITS Directive (in terms of leverage limit in particular) - and which are very different from hedge funds or highly leveraged funds. For instance in the French legislation related to insurers, the French “fonds d’investissement à vocation générale FIVG” (i.e. French UCITS-like funds) are treated exactly in the same way as UCITS, regarding eligibility, ratios per fund, etc. as they comply with a very similar set of rules. In particular, in the French legislation, UCITS and French FIVG funds have to comply with exactly the same limit in the use of derivatives, in terms of maximum leverage – i.e. 100% of the net asset value. This limitation in terms of leverage at the same level as for UCITS is, according to us, the key criterion for allowing the exclusion of UCITS-like funds from the scope of shadow banking;
However, we recognize that, as the AIFM Directive mainly regulates the managers and not the funds themselves, the majority of AIFs are not regulated at pan-EU level today;
Therefore, we propose that AIFs be exempted from the scope if two conditions are fulfilled:
• Their asset managers are regulated by the EU AIFM Directive;
• and national regulations set a product framework imposing restrictions on AIFs similar to those of UCITS. The criterion of a leverage limit at the same level as for UCITS could be used, as this criterion of leverage has been explicitly identified by the EBA for justifying the exemption of UCITS funds out of the scope of shadow banking.
Therefore, although we support EBA’s proposed exclusion of non-MMF UCITS, in addition we think that:
- MMFs, as soon as the MMF Regulation is adopted,
- and AIFs which are UCITS-like funds due to the requirements they comply with at national level, in particular in terms of leverage limit,
should be excluded as well.
If a more granular approach had to be followed in order to compare nationally regulated UCITS-like funds and UCITS funds, we suggest that ESAs should provide for an acknowledgment of equivalence. We have taken note that the EBA is allowing for an ‘equivalence’ with third country regimes when considering prudential regulation, and then we don’t see why this ‘equivalence’ approach couldn’t be followed, in a similar way, within the EU itself, for assessing the equivalence between the UCITS regime and national UCITS-like regimes.