Macroprudential measures applicable to AIFMs

Macroprudential measures can be taken by the CSSF under Article 25 of the Alternative Investment Fund Managers’ Directive (“AIFMD”) on the use of information by competent authorities, supervisory cooperation and limits to leverage, as implemented into Luxembourg legislation by Article 23 of the Law of 12 July 2013 on alternative investment fund managers (“AIFM Law”).

It specifically stipulates that the CSSF shall assess the risks that the use of leverage by a Luxembourg alternative investment fund manager (“LU AIFM”) with respect to the AIFs it manages could entail. Where deemed necessary, in order to ensure the stability and integrity of the financial system, the CSSF, after having notified the European Securities and Markets Authority (“ESMA”), the European Systemic Risk Board (“ESRB”) and, if applicable, the competent authorities of the relevant AIF, shall impose limits to the level of leverage that an LU AIFM is entitled to employ or other restrictions on the management of the AIF with respect to the AIFs under its management to limit the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system or risks of disorderly markets.

The September 2022 gilt market crisis highlighted vulnerabilities amongst GBP liability driven investment (“LDI”) strategies that pose a risk to financial stability. Against this backdrop and following a public consultation on 23 November 2023 coordinated with the Central Bank of Ireland, the CSSF published on 29 April 2024 a policy framework for GBP LDI funds managed by LU AIFMs. These measures, which codify the expectations set out by the CSSF in its industry letter of November 2022, aim at ensuring the continuing resilience of GBP LDI funds and, on that basis, reducing the probability that such funds will contribute to future crises.

The main aspects of this policy framework include:

• GBP LDI funds must maintain resilience to a minimum of 300 bps increase in UK yields before their NAV turns negative.
• The yield buffer applies to all GBP LDI funds managed by LU AIFMs.
• All exposures of the funds are to be considered in the yield buffer’s calculation subject to the buffer composition and liquidity criteria set out in the framework.
• GBP LDI funds are required to calculate their monthly average yield buffer at the end of each month. The monthly average yield buffer must be reported as a single observation to the CSSF following each month-end and should be greater than or equal to 300 bps.
• To provide limited flexibility, one of the last four monthly reporting observations can be below 300 bps in exceptional circumstances. The use of this flexibility will be monitored, with the expectation that it is not used on a regular basis.

LU AIFMs managing GBP LDI funds are required to transmit a reporting to the CSSF on a monthly basis by filling in the dedicated template. Notifications by AIFMs of prolonged and/or substantial deviations and breaches of the yield buffer measure should be reported to the CSSF by email to opc_prud_risk@cssf.lu.

For GBP LDI funds managed by LU AIFMs that existed before 29 April 2024, the policy framework will apply from 29 July 2024, while for any new GBP LDI funds created after 29 April 2024, the LU AIFM must comply with the framework immediately.