EUROPE - The current draft of the Alternative Investment Fund Managers European directive could give rise to significant legal uncertainty and "systemic failure", a committee of the Bank of England said.
The Financial Markets Law Committee highlighted in a paper a number of issues in the AIFM directive which could lead to "systemic failure and widespread market disruption, unless they are properly amended".
The scope of the current draft is uncertain - the FMLC said - because there is no clarity on the meaning of Alternative Investment Fund and Alternative Investment Fund Manager.
In addition, the FMLC said the draft did not define the term "leverage with any precision", while introducing the provision for the European Commission to set limits on the amount of leverage which the AIFMs can employ.
The current text could be inconsistent and give rise to conflicts with the existing financial services directives. This, in turn, would create legal uncertainty as to the general application of European legislation.
Other sources of legal uncertainty include the difficulty in interpreting the depositary's obligation to verify whether the AIFM has obtained the ownership of all the assets in which the AIF invests. And the practical problems associated with fulfilling this obligation, the FMLC added.
The paper concluded that a condition for the directive to be successful is that there is no doubt on its scope. This would avoid uneven implementation and the possibility of regulatory arbitrage across EU member states.
The first proposal for the AIFM was published by the EU Commission in April 2009. The intention of the Commission was to address a wide range of risks which, it said, could present a threat to the stability and integrity of EU financial markets.
At the time, it also said legislative provisions at European level were necessary as different national approaches were not robust enough to avert those risks.
The presidency of the EU Council published two revised texts of the directive in November and December 2009. The text is still under discussion at European Council level.
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