Leveraged financing by investment institutions
The implementation of the AIFM Directive in Dutch legislation has brought a new supervision task to DNB with respect to investment institutions, i.e. supervision on the extent to which investment institutions make use of leveraged financing. The supervision on the use of leveraged financing is important in view of prevention of system risks, which may occur e.g. due to failing risk management at an investment institution that manages substantial assets while making heavy use of leveraged financing. This form of supervision is also important as the continuity of the institution may come under threat if, due to failing risk management, the institution has no sufficiently clear perception of the risks that it is exposed to.
The manager's obligations
The manager should prove to DNB that the limits for leveraged financing that the institution uses are reasonable and that the manager is adhering to them.
DNB may set upper limits to the degree of leveraged financing used by the manager, or impose further restrictions on the manager with respect to the management of an investment institution if it believes that this is necessary in order to safeguard the stability of the financial system. This allows DNB to supervise the stability of the financial system. Safeguarding financial stability should be interpreted in a broad sense. Not all terms mentioned in the AIFM Directive (integrity of the financial system, danger of chaotic market conditions, risks to sustainable economic growth) were incorporated literally into Section 3:18b of the Financial Supervision Act, as these terms fall under the more commonly used term of 'financial stability of the system'.
Sharing of information by Member States
DNB shares the acquired information on the use of leveraged financing with the supervisors of the other Member States, ESMA and the ESRB. In this way, possible sources of risk to financial market stability in the EU are identified.