On November 18, the International Organization of Securities Commissions (IOSCO) published a consultation paper on a proposed framework to assess leverage in investment funds, as part of an effort to address risks to global financial stability resulting from asset management activities. The initiative responds to a request by the Financial Stability Board (FSB) to identify or develop consistent measures of leverage in funds to support more meaningful monitoring of leverage for financial stability purposes and help enable direct comparisons across funds and at a global level.
IOSCO’s consultation paper proposes a two-step approach and a range of potential leverage metrics. The first step is designed to help regulators efficiently exclude from consideration funds that are unlikely to pose risks to the financial system. The second step involves a risk-based analysis of the funds identified in step one.
Although the IOSCO initiative is at an early stage of development, we believe that the consultation paper’s assessment of various metrics and the questions posed for consultation may be of interest to compliance staff and executives who wish to become more familiar with different approaches to evaluating leverage in investment funds.