## _cr16193

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### Executive summary — key findings
- Germany has a large and diverse asset management sector and applies a strong and comprehensive regulatory framework.
- The sector is the third-largest in Europe, as measured by all managed assets.
- Total investment fund assets under management (AUM) by German fund management companies reached approximately EUR 1,600 billion at end 2013, representing roughly 57 percent of Germany’s GDP.
- The regulatory framework takes full account of EU legislation and IOSCO standards, with adjustments reflecting German market specificities and BaFin’s priorities.
- BaFin is described as a well-respected and authoritative body that understands the asset management industry and supervises it in a firm but fair manner; it is sufficiently well-resourced to maintain close contact with asset managers and depositaries.
- The valuation framework is of a high caliber and is in line with international standards.
- Additional safeguards were introduced since the previous FSAP to address liquidity problems experienced by certain open-ended real estate funds following the financial crisis.
- BaFin can monitor the sector using extensive data shared by the Bundesbank; the data is sufficiently granular to identify individual exposures swiftly and accurately.
- Reporting under the AIFMD will further enhance BaFin’s quantitative oversight as it becomes more reliable.

### Main recommendations (priorities indicated)
- High
  - Put in place requirements to ensure that fund depositaries are systematically informed of material pricing errors and that the information is immediately passed on to BaFin. Ensure that all management companies (including smaller ones) have policies in place to compensate investors in the event of material pricing errors.
  - Step up the intensity of BaFin’s supervisory engagement by increasing the frequency of on-site inspections and accompanying external audits on a more regular basis.
  - Adjust BaFin’s risk classification framework to take into account a broader range of factors than the AUM of an entity, e.g., the level of leverage and the extent of interconnectedness.
- Medium
  - Consider introducing a broader range of pricing tools, including swing pricing or ad hoc redemptions fees, for investment funds in Germany.
  - Consider putting in place a broader set of liquidity management tools, such as gates and side pockets, to complement the existing possibility to suspend redemptions.
  - Carry out more structured and systematic analysis of information on funds and management companies.

### Market structure and participants
- Special AIFs represent 75 percent of the total AUM in Germany, while retail funds (UCITS and both open- and closed-ended retail AIFs) account for the remaining 25 percent.
- Money market funds (MMFs) represent less than EUR 4bn out of a total of EUR 1.7tn for open-ended funds.
- There are no MMFs with a constant net asset value as such a mechanism is legally prohibited.
- Germany classifies funds into UCITS funds or alternative investment funds (AIFs); Spezialfonds (special AIFs) can be open-ended or closed-ended and are marketable only to professional and semi-professional investors.
- Non-EEA AIFMs/AIFs are currently subject to National Private Placement Regimes (NPPRs) in some member states, including Germany.

### Regulatory responsibilities and systemic monitoring
- BaFin has primary responsibility for regulation and supervision of fund management and aims to limit risks to the German financial system and preserve integrity.
- Bundesbank monitors and analyzes risks in the investment fund sector from a macroprudential perspective under its mandate according to the Financial Stability Act.
- The 2011 FSAP recommendation to refine risk-scoring approaches and increase use of on-site inspections has been partially addressed by BaFin.

### Valuation framework and practices
- UCITS: valuation must be carried out at least twice a month (Article 76(1) of the UCITS Directive); the KAGB requires NAV to be calculated on every occasion there is a possibility to subscribe or redeem units (daily for most UCITS).
- AIFMD: AIF assets must be valued and NAV per unit calculated at least once a year; for open-ended AIFs valuations and calculations must be at a frequency appropriate to the assets held and issuance/redemption frequency; financial instruments must be valued every time NAV per unit is calculated; other assets at least once a year and whenever evidence indicates the last determined value is no longer fair or proper.
- AIFMD valuation governance:
  - If the AIFM performs valuation, those responsible must be functionally independent from portfolio management and subject to remuneration/conflict mitigation.
  - External valuers must be independent and cannot delegate the valuation function.
  - The AIFM must notify the competent authority of appointment of an external valuer.
- For assets admitted to trading on a regulated market, quoted prices must be taken as market value when reliable.
- For assets not traded, market value should be established using prudent assessment and appropriate valuation models.
- Closed-ended CIS: for 12 months following acquisition the purchase price is to be taken as market value; for tangible assets acquisition costs should be estimated separately and written off over expected life-cycle or, at the latest, after ten years; acquisition costs must be written off in entirety if the asset is sold.

### Accounting and audit
- Contractual investment funds: accounting standards are set out in the KAGB and further specified in KARBV; annual financial statements of investment limited partnerships or investment stock corporations generally follow the HGB supplemented/modified by investment-specific requirements under the KAGB and KARBV.
- Main differences between German GAAP (KAGB and KARBV) and IFRS highlighted for liabilities, valuation of fund units and consolidation/measuring of subsidiaries under IFRS 10 and IFRS 9/IAS 39.
- German requirements appear to comply with IOSCO Principles 26 and 27 regarding CIS accounts and NAV calculation.
- Annual audit report must contain a statement on orderliness of unit price calculation; if a pricing error is identified, reasons and measures taken must be explained unless the error is not material.

### Treatment of pricing errors (findings and recommendation)
- IOSCO: responsible entities should have policies and procedures to detect, prevent and correct pricing errors; material harm requires prompt correction and full investor compensation.
- In Germany:
  - In most cases management companies inform BaFin about pricing errors, measures taken and indemnification.
  - Larger management companies have internal guidelines on investor compensation.
- Recommendation:
  - BaFin should require the depositary be informed systematically of such errors where the management company has conducted the valuation, and that the depositary then informs BaFin immediately.
  - BaFin should ensure all management companies (including smaller ones) have policies to compensate investors in the event of material pricing errors.

### Risk and liquidity management; pricing tools
- UCITS: managers must employ risk management processes to monitor/measure risk including liquidity risk; valuation frequency and liquidity profile must match disclosed redemption policy; stress tests required where appropriate.
- AIFMD: AIFMs must ensure consistency of investment strategy, liquidity profile and redemption policy; employ liquidity management systems and regular stress testing; disclose liquidity risk management and redemption rights to investors; manage conflicts between redeeming and remaining investors and between AIFM incentives and redemption policy.
- BaFin circular InvMaRisk (2010) obliges all funds to carry out stress testing regularly.
- Pricing tools:
  - Neither UCITS Directive nor AIFMD expressly refers to pricing tools; German legislation has no express provision.
  - BaFin supervisory practice allows redemptions in kind by “vertical slicing” under limited circumstances for special and retail funds.
  - IMF Global Financial Stability Report (April 2015) suggested swing- or dual-pricing rules and charging redemption fees to reduce first-mover advantage.
  - Swing pricing methods described:
    - “Full” swinging: NAV adjusted each time there is any net capital activity.
    - “Partial” swinging: NAV swung only when net capital activity exceeds predefined “swing threshold.”
- Recommendation:
  - Consider introducing a broader range of pricing tools, including swing pricing or ad hoc redemption fees, with BaFin monitoring and detailed guidelines to mitigate investor arbitrage.

### Suspension, deferral of redemptions and alternative liquidity tools
- UCITS Article 84: UCITS may temporarily suspend redemption of units in accordance with national law and fund rules only in exceptional cases in the interest of unitholders; competent authority and investors must be informed. These requirements are reflected in German law.
- BaFin can order suspension of redemptions if necessary in interests of investors or the public.
- Real estate funds: investments must be held for minimum period of 24 months; 12 months’ notice required for redemption requests; management company obliged to suspend redemption if deposits/proceeds are insufficient to pay redemption price or ensure proper ongoing management.
- German law does not currently provide for other specific liquidity tools (e.g., gates, side pockets), potentially leaving suspension as the only option.
- Recommendation:
  - Consider merits of putting in place other tools (e.g., gates and side pockets) to help when normal redemption activity becomes challenging but full suspension would not be justified; BaFin should monitor need for detailed guidelines on their use.

### Use of leverage and leverage measurement
- UCITS:
  - Limits global exposure from derivative instruments to 100 percent of total net value.
  - Global exposure calculated using either the commitment approach or VaR method.
  - Borrowing is not taken into account when determining UCITS leverage; UCITS may borrow up to 10 percent of NAV.
- AIFMD:
  - Defines leverage broadly (borrowing, embedded derivative leverage, other means).
  - Requires AIFMs to set leverage limits for each AIF they manage; does not set maximum leverage limits.
  - Leverage must be calculated using two methods: the gross method and the commitment method.
  - Overall leverage expressed as ratio between exposure and NAV.
  - An AIF is “substantially leveraged” when exposure calculated according to the commitment method exceeds three times its net asset value.
  - AIFMs managing substantially leveraged AIFs must make additional information available to competent authorities, including overall level of leverage and extent of asset reuse under leveraging arrangements.
- Box 2 summary of calculation elements for UCITS and AIFMD methods provided in source.

### Depositaries, safekeeping, segregation and liability
- UCITS Directive and AIFMD require appointment of a depositary for each UCITS and AIF.
- German UCITS depositary eligibility stricter than UCITS IV: only credit institutions may act as UCITS depositary in Germany, with initial capital requirement of at least EUR 5 million.
- A depositary for a German AIF can be a credit institution or a financial services institution licensed for limited custody business; for financial services institution depositaries initial capital must be at least EUR 730,000.
- Depositary independence: AIFMD and UCITS V require functional and hierarchical separation and conflict identification/management; German law adds restrictions (managing directors, holders of power of procuration and agents representing depositary may not be employees of the AIFM or UCITS management company).
- Safekeeping and segregation:
  - Securities, certificates of deposit and deposits belonging to a UCITS must be placed in a blocked account; management company can dispose only with cooperation of depositary.
  - Assets that cannot be held in custody must be monitored by the depositary and listed.
  - Delegation to sub-custodians permitted only if segregation and identification requirements met; delegation to non-EU entities limited to extent required by third-country law and only while no local entities satisfy delegation requirements; investors must be informed prior to investment.
- Delegation and reuse under UCITS V: only safekeeping functions may be delegated; reuse of client assets for account of depositary or another client is prohibited.
- Liability:
  - AIFMD: depositary remains liable for loss of financial instruments held in custody unless it proves loss arose from an external event beyond its reasonable control; contractual discharge of liability permitted subject to conditions.
  - UCITS V: does not allow any discharge of liability when safekeeping duties have been delegated and requires member states to ensure assets in custody unavailable to depositary/third party creditors on insolvency.
- Recommendation:
  - BaFin should continue to contribute actively to EU-level discussions to develop a common approach to interpretation of segregation obligations in the AIFMD.

### Authorization, delegation and fund approvals
- BaFin authorizes firms to conduct fund management activities; key elements include initial capital requirements, fit and proper directors, and an appropriate business plan.
- BaFin’s asset management department carries out authorization; informal contact before formal application is common.
- Case officers: general policy to have two case officers for each firm for authorization and supervision.
- Registered management companies below AIFMD threshold: if they manage only special AIFs they are subject only to registration and reporting; if they also manage retail AIFs they are subject to broader rules.
- Delegated management: portfolio managers receiving delegated functions must be authorized/registered and supervised; delegation to entities outside the EU requires appropriate cooperation arrangements between BaFin and the third-country regulator.
- BaFin approval is required for depositaries of UCITS and retail AIFs, but not for special AIFs (trustee exceptions subject to financial guarantees).
- BaFin approval required for fund rules of retail CIS (UCITS and retail AIFs); approval must be granted within four weeks if statutory requirements met. Special AIFs: notification suffices.

### Supervision, inspections and enforcement
- Supervision lies within the Investment Funds Department in the Securities Division of BaFin: 118 staff across 7 units.
- Number of management companies authorized under the KAGB – 132 – as of August 2015.
- On-site inspection frequency guided by an internal 12-point risk classification matrix using quality of firm and market impact (AuM); classification scale 3A to 1D.
- BaFin manual for on-site inspections (2012) specifies routine meeting/audit frequency; each supervision unit must accompany annually at least two management companies’ routine audits.
- Periodic inspections (reported):
  - 2012: 54 supervisory visits and annual meetings on-site; 25 audits accompanied.
  - 2013: 96 supervisory visits and annual meetings on-site; 22 audits accompanied.
  - 2014: 80 supervisory visits and annual meetings on-site; 9 audits accompanied.
- Thematic inspections and market surveillance launched in 2012; examples include new-product reviews, good conduct rules implementation, cyber-crime, closet indexing, and bond market risks inspection (late 2015).
- Findings/recommendation:
  - BaFin should consider stepping up supervisory intensity given market size/diversity, including more audits/inspections and expanding impact assessment beyond AuM to include leverage and interconnectedness where data allows.
- Enforcement powers include license revocation, dismissal requirements, administrative fines (up to EUR 50,000 or EUR 100,000 depending on case), UCITS V increases (as high as EUR five million), general enforcement fines (Zwangsgeld) and Financial Services Supervision Act enforcement fines up to EUR 250,000.
- In the past three years BaFin has not imposed any administrative fines or other sanctions.

### Reporting, data sources and systemic risk monitoring
- New AIFMD transparency reporting covers principal markets and instruments, current risk profile of the AIF, and for substantially leveraged funds extent of asset reuse.
- BaFin started to receive AIFMD reports relatively recently and has not yet started meaningful analysis of the data.
- BaFin receives monthly data on open-ended funds from the Bundesbank (also provided to the ECB in aggregated form) with portfolio composition information; Bundesbank started to include closed-ended funds data and expects to share these with BaFin in the course of 2016.
- Derivatives reporting (DerivateV) requires yearly reports for each UCITS on derivatives/structured products; for open-ended retail AIFs and special AIFs these reports provided at BaFin request; BaFin must be informed quarterly about number and size of outliers in backtesting.
- BaFin uses periodic and ad hoc reports for thematic analysis (examples: exposure to Greek securities; currency risk exposure to the Swiss franc).
- Recommendation:
  - BaFin should carry out more systematic analysis of information received from fund managers (directly or via Bundesbank), including automatic flags for breached thresholds and analysis of AIFMD data to identify risks or problems as they arise.

### Systemic risk governance and inter-agency cooperation
- Securities Division established a regulatory process to monitor, mitigate and manage systemic risk, designed bottom-up and top-down with three units involved.
- Key governance elements:
  - Risk Secretariat within securities supervision (chaired by head of unit and staffed with 3 people).
  - Working Group on Risk (AGR) chaired by head of securities supervision; meets quarterly and ad hoc.
  - Sub-Group on Risk (UAGR) prepares contributions for AGR.
  - BaFin cross-sectoral structures include BaFin Risk Secretariat (3 people) and BaFin Risk Committee; meets quarterly.
- National coordination:
  - Regular quarterly meetings between BaFin Risk Committee and Bundesbank; Financial Stability Committee (Ausschuss für Finanzstabilität) includes Finance Ministry, Bundesbank, BaFin and FMSA.
- Information sources for systemic risk monitoring:
  - internal supervisory reporting, supervisory surveys, Bundesbank data, market data, qualitative and quantitative supervision inputs, risk reports from ESMA/IOSCO/ESRB/IMF, international working groups.
- Outputs: BaFin risk report and sectoral risk list including existing measures and possible further measures or regulatory gaps.
- Box: Loan origination by funds
  - May 2015: BaFin changed administrative practice—certain AIFs marketed to professional investors and managed by an authorized/registered AIFM are now entitled to originate loans; practice to be enacted into German law in parallel with transposition of UCITS V; BaFin issued recommendations on loan origination practices and will monitor take-up.

*IMF staff report excerpt as provided in the supplied content.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### _cr16193 - EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### Executive summary — key findings
- Germany has a large and diverse asset management sector and applies a strong and comprehensive regulatory framework.
- The sector is the third-largest in Europe, as measured by all managed assets.
- Total investment fund assets under management (AUM) by German fund management companies reached approximately EUR 1,600 billion at end 2013, representing roughly 57 percent of Germany’s GDP.
- The regulatory framework takes full account of EU legislation and IOSCO standards, with adjustments reflecting German market specificities and BaFin’s priorities.
- BaFin is described as a well-respected and authoritative body that understands the asset management industry and supervises it in a firm but fair manner; it is sufficiently well-resourced to maintain close contact with asset managers and depositaries.
- The valuation framework is of a high caliber and is in line with international standards.
- Additional safeguards were introduced since the previous FSAP to address liquidity problems experienced by certain open-ended real estate funds following the financial crisis.
- Recommendations for further enhancement include:
  - introducing mechanisms such as swing pricing to reduce the first-mover advantage in single-priced funds;
  - allowing a broader range of tools to address market illiquidity that could affect redemption capacity;
  - ensuring BaFin is made aware of pricing errors and that investor compensation rules are in place and applied by all asset managers.
- BaFin can monitor the sector using extensive data shared by the Bundesbank; the data is sufficiently granular to identify individual exposures swiftly and accurately.
- Reporting under the AIFMD will further enhance BaFin’s quantitative oversight as it becomes more reliable.
- BaFin should ensure systems are in place to assess AIFMD-reported information and, when necessary, communicate issues to supervisory authorities in other EU member states.
- BaFin should contribute to European and international discussions on developing a single method of calculating leverage.

### Main recommendations (Table 1 highlights)
- Put in place requirements to ensure that fund depositaries are systematically informed of material pricing errors and that the information is immediately passed on to BaFin. Ensure that all management companies (including smaller ones) have policies in place to compensate investors in the event of material pricing errors. — High
- Consider introducing a broader range of pricing tools, including swing pricing or ad hoc redemptions fees, for investment funds in Germany. — Medium
- Consider putting in place a broader set of liquidity management tools, such as gates and side pockets, to complement the existing possibility to suspend redemptions. — Medium
- Step up the intensity of BaFin’s supervisory engagement by increasing the frequency of on-site inspections and accompanying external audits on a more regular basis. — High
- Adjust BaFin’s risk classification framework to take into account a broader range of factors than the AUM of an entity, e.g., the level of leverage and the extent of interconnectedness. — High
- Carry out more structured and systematic analysis of information on funds and management companies. — Medium

### Introduction — scope and approach
- This technical note provides an update on the German asset management sector and analyzes key aspects of the regulatory and supervisory regime.
- The note was prepared as part of the 2016 Financial Sector Assessment Program (FSAP) by Richard Stobo (an external expert engaged by the IMF), drawing on discussions during a mission that took place from November 3 to 18, 2015.
- The mission reviewed regulation, supervision and systemic risk monitoring of investment funds and their managers using IOSCO principles and standards as benchmarks.
- Focus was placed on areas where EU requirements leave room for member state discretion and where IOSCO has issued more detailed standards, with emphasis on requirements most relevant for financial stability: valuation, segregation and safekeeping of fund assets, and redemption of fund units.

### Fund management — market structure and participants
- Special AIFs represent 75 percent of the total AUM in Germany, while retail funds (UCITS and both open- and closed-ended retail AIFs) account for the remaining 25 percent.
- The investor base is diverse, with an important role being played by insurance companies and credit institutions.
- Money market funds (MMFs) represent a very small proportion of the German market: MMF represent less than EUR 4bn out of a total of EUR 1.7tn for open-ended funds.
- There are no MMFs with a constant net asset value as such a mechanism is legally prohibited.
- As an EU member state, Germany classifies investment funds into UCITS funds or alternative investment funds (AIFs). Key distinctions include:
  - UCITS Directive requires a UCITS fund to be authorized and covers both managers and funds.
  - AIFMD applies primarily to managers (AIFMs) and contains a detailed framework for non-EEA AIFMs and non-EEA AIFs’ marketing in the EEA; that framework is not yet fully applicable and non-EEA AIFMs/AIFs are currently subject to National Private Placement Regimes (NPPRs) in some member states, including Germany.
- Germany has Spezialfonds (special AIFs) that can be open-ended or closed-ended and are marketable only to professional and semi-professional investors.

### Regulatory responsibilities and systemic monitoring
- BaFin has primary responsibility for regulation and supervision of fund management and aims to limit risks to the German financial system and preserve integrity.
- Bundesbank monitors and analyzes risks in the investment fund sector from a macroprudential perspective under its mandate according to the Financial Stability Act.
- The last FSAP (2011) recommended BaFin refine risk-scoring approaches and increase use of on-site inspections; BaFin has taken action to address both recommendations.

### Valuation of assets — regulatory framework and practices
- The UCITS Directive requires national law or fund instruments to lay down rules for valuing assets and calculating UCITS unit prices; member states determine valuation requirements for UCITS funds.
- UCITS fund managers are responsible for calculating NAV and subscription/redemption prices and must have accounting policies and procedures in accordance with the home state's accounting rules and fund prospectus.
- Valuation frequency:
  - UCITS: valuation must be carried out at least twice a month (Article 76(1) of the UCITS Directive). The KAGB requires NAV to be calculated on every occasion there is a possibility to subscribe or redeem units, which means daily for most UCITS.
  - AIFMD: AIF assets must be valued and NAV per unit calculated at least once a year; for open-ended AIFs, valuations and calculations must be carried out at a frequency appropriate to the assets held and issuance/redemption frequency. Financial instruments must be valued every time NAV per unit is calculated; other assets must be valued at least once a year and whenever there is evidence the last determined value is no longer fair or proper.
- AIFMD valuation governance:
  - If the AIFM performs valuation, those responsible must be functionally independent from portfolio management; remuneration and other measures must mitigate conflicts of interest.
  - Any external valuer must be independent from the AIF, the AIFM and any person with close links to them; the depositary cannot be appointed as external valuer unless functionally and hierarchically separated and conflicts properly managed and disclosed.
  - External valuers are prohibited from delegating the valuation function.
  - The AIFM must notify the competent authority of the appointment of an external valuer.
  - Competent authorities may require verification of valuation procedures/valuations by an external valuer or auditor and may require an external valuer to verify independence of internal valuation.

*Source: _cr16193 - EXECUTIVE SUMMARY ___________________________________________________________________________ 4*

### 16.      In Germany the same valuation rules apply to open-ended retail CIS and open-ended

### 16.      In Germany the same valuation rules apply to open-ended retail CIS and open-ended

### Valuation rules for open-ended CIS
- For assets admitted to trading on a regulated market, the quoted prices of these assets must be taken as the market value, provided that this ensures a reliable valuation.
- For assets not admitted to trading or for which no traded price is available, the market value should be established based on a prudent assessment using appropriate valuation models and taking into account market conditions.

### Closed-ended CIS
- Separate rules apply for the valuation of closed-ended funds.
- For a period of 12 months following the acquisition of an asset, the purchase price of the asset is to be taken as the market value.
- If the AIFM is of the view that the purchase price is no longer a reliable indicator due to changes in valuation factors, it should calculate a new market value and must document its decisions and reasoning for such a calculation.
- For tangible assets (such as real estate, ships or infrastructure):
  - Acquisition costs should be estimated separately and written off over the course of the expected life-cycle of the investment or, at the latest, after ten years.
  - If such an asset is sold, the acquisition costs must be written off in their entirety.
  - Details on the sale and purchase of tangible assets made during the reporting period are to be included in an annex to the financial statements of the fund.

### Role of depositaries and auditors
- Both UCITS and AIF depositaries have important obligations regarding valuation of fund units.
- German law provides that the net asset value of a UCITS must be determined by the depositary in cooperation with the management company, or by the management company itself.
  - If the management company values the assets, the depositary must supervise the valuation process.
  - If the depositary values the assets in cooperation with the management company, the management company must verify the depositary’s measurement approaches.
- The management company’s internal audit function must check compliance with valuation principles.
- The depositary of an AIF must ensure that the calculation of the value of units of an AIF complies with statutory provisions and the fund rules.

### Accounting rules
- For contractual investment funds (typical structure in Germany), accounting standards are set out in the KAGB and further specified in KARBV.
- For the annual financial statement of an investment limited partnership or an investment stock corporation, provisions of the German Commercial Code (HGB) generally apply, supplemented or modified by investment-specific requirements under the KAGB and KARBV.
- Main differences between German GAAP (KAGB and KARBV) and IFRS:
  - Liabilities: under German GAAP, liabilities are measured at their repayment value; under IFRS 39, financial liabilities are measured initially at fair value and subsequently at amortized cost using the effective interest method.
  - Valuation of fund units: German GAAP requires measurement at their last determined redemption price or, if admitted to trading on a stock exchange or other regulated market, at their current price.
  - IFRS 10 para. 32 requires an investment entity to consolidate a subsidiary where that subsidiary provides services related to the investment entity’s investment activities or to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 or IAS 39 (IFRS 10 para. 31).
- German requirements appear to comply with Principles 26 and 27 of the IOSCO Principles requiring CIS accounts and NAV calculation in accordance with high quality, internationally acceptable accounting standards.

### Treatment of pricing errors
- UCITS Directive and AIFMD include general references to treatment of pricing errors:
  - UCITS Directive notes UCITS home member state rules apply to errors in NAV calculation and related investor compensation.
  - AIFMD implementing measures require an AIFM to ensure remedial procedures are in place in the event of an incorrect calculation of the NAV.
- IOSCO’s Principles for the Valuation of Collective Investment Schemes: “responsible entities” should have policies and procedures to detect, prevent and correct pricing errors; pricing errors that result in material harm to CIS investors should be addressed promptly and investors fully compensated.
- In Germany:
  - Annual audit report must contain a statement on the orderliness of the calculation of unit prices.
  - If a pricing error is identified, reasons and measures taken by the management company to eliminate the error must be explained (unless the error is not material).
  - In most cases management companies inform BaFin about such errors, measures taken and indemnification of investors.
  - Larger management companies have internal guidelines on investor compensation.
- Recommendation:
  - BaFin should require that the depositary be informed systematically of such errors where the management company has conducted the valuation, and that the depositary then informs BaFin immediately.
  - BaFin should ensure all management companies (including smaller ones) have policies to compensate investors in the event of material pricing errors.

### Risk and liquidity management
- UCITS requirements:
  - Subject to investment limits set out in the UCITS Directive.
  - Manager must employ a risk management process to monitor and measure risk of positions and their contribution to overall portfolio risk at any time.
  - UCITS Implementing Directive adds due diligence and risk management/measurement requirements.
  - Risk management policy must include procedures to assess exposure to liquidity risk.
  - Competent authority must review the risk management policy when authorizing the manager and on an ongoing basis; any material changes must be notified.
  - Management company must adopt effective arrangements, processes and techniques to maintain a documented system of internal risk limits, including for liquidity risk.
  - Manager must employ an appropriate liquidity risk management process to ensure compliance with redemption obligations and, where appropriate, conduct stress tests to assess UCITS liquidity risk under exceptional circumstances.
  - Liquidity profile must be appropriate to the disclosed redemption policy.
- AIFMD requirements:
  - AIFM must ensure investment strategy, liquidity profile and redemption policy of each AIF are consistent.
  - Must employ an appropriate liquidity management system and procedures to monitor liquidity risk and ensure investment liquidity profile complies with obligations.
  - Must regularly conduct stress tests, under normal and exceptional conditions.
  - Must disclose to investors a description of the AIF’s liquidity risk management, including redemption rights in normal and exceptional circumstances and existing redemption arrangements.
  - AIFMs must identify, manage and monitor conflicts of interest between redeeming and remaining investors and between the AIFM’s incentive to invest in illiquid assets and its redemption policy.
- BaFin issued a circular in 2010 (InvMaRisk) setting out a robust framework, including obligation on all funds to carry out stress testing on a regular basis.

### Pricing tools
- Neither the UCITS Directive nor AIFMD expressly refers to the use of pricing tools; German legislation does not make express provision for such tools.
- BaFin supervisory practice allows redemptions in kind in the following cases:
  - Special funds: redemption in kind is allowed if laid down in fund rules; may only be carried out by way of “vertical slicing” (assets redeemed must be proportionate to portfolio composition).
  - Retail funds: redemption in kind only in exceptional cases, where investors agree unanimously and there is no adverse impact on market; can only be carried out by way of “vertical slicing.”
- Frequent trading characteristics:
  - Transaction costs dilute value of existing shareholders’ interests in a single-priced fund because single price reflects NAV but not dealing costs.
  - This creates incentives for investors to be first to redeem (“first mover advantage”), potentially exacerbating runs on the fund.
- IMF Global Financial Stability Report (April 2015) suggested tools to reduce first-mover advantage, including swing- or dual-pricing rules and charging redemption fees.
  - Swing pricing: two methods described
    - “Full” swinging: NAV adjusted each time there is any net capital activity, direction determined by net flows of the day.
    - “Partial” swinging: process triggered and NAV swung only when net capital activity exceeds predefined “swing threshold.”
- Recommendation:
  - Consider introducing a broader range of pricing tools, including swing pricing or ad hoc redemption fees, for investment funds in Germany.
  - Because use of such tools could lead to investor arbitrage, the need for detailed guidelines on their use should be monitored carefully by BaFin and contribute to relevant EU or international standard-setting work.

### Suspension and deferral of redemptions
- No specific UCITS Directive or AIFMD requirements on suspension of redemptions beyond Article 84 of UCITS Directive:
  - UCITS may temporarily suspend redemption of units in accordance with national law and fund rules, only in exceptional cases where suspension is in the interest of unitholders.
  - Competent authority and investors must be informed about any suspension.
  - These requirements are reflected in German law.
- IOSCO Principles: where permissible and appropriate, CIS constitutional documents should include ability to use specific tools or exceptional measures affecting redemption rights.
- BaFin powers:
  - BaFin can order the management company to suspend redemption of fund units if necessary in interests of investors or the public.
- Real estate funds specific rules:
  - Investments must be held for a minimum period of 24 months.
  - 12 months’ notice is required for redemption requests.
  - Management company obliged to suspend redemption of units if bank deposits and proceeds from the funds invested are not sufficient to pay redemption price and ensure proper ongoing management, or are not immediately available.
  - Provisions developed in light of difficulties experienced by German open-ended real estate funds in financial crises of 2004/5 and 2008/9, which led to suspensions.
- German law does not currently provide for other specific tools or measures to deal with liquidity problems, which could leave suspension as the only option even where less extreme measures might suffice.
- Recommendation:
  - Consider merits of putting in place other tools (e.g., gates and side pockets) to help when normal redemption activity becomes challenging but full suspension would not be justified or in investors’ best interests.
  - Because such tools could raise investor protection concerns, BaFin should monitor need for detailed guidelines on their use.

### Use of leverage
- EU regulatory framework differs for UCITS and AIFs.
- UCITS:
  - Limits global exposure from derivative instruments to 100 percent of the total net value of the UCITS portfolio.
  - Global exposure calculated using either the commitment approach or VaR method.
  - Borrowing is not taken into account when determining UCITS leverage; UCITS are permitted to borrow up to 10 percent of NAV.
- AIFMD:
  - Defines leverage as “any method by which the AIFM increases the exposure of an AIF whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means.”
  - Requires AIFMs to set leverage limits for each AIF they manage, but does not set maximum limits on leverage.
  - Leverage must be calculated using two methods: the gross method and the commitment method.
  - Overall leverage of an AIF is expressed as a ratio between the exposure of the AIF and its NAV.
  - An AIF is considered to be “substantially leveraged” when the exposure of the AIF calculated according to the commitment method exceeds three times its net asset value.
  - AIFMs that manage AIFs employing leverage on a substantial basis must make available additional information to their competent authorities, including the overall level of leverage employed by each AIF and the extent to which the AIF’s assets have been reused under leveraging arrangements.

### Box 2 — Leverage calculation methods (summary)
- UCITS: standard methodology is the commitment approach; global exposure accounts for financial derivatives and SFTs that generate leverage; netting and hedging arrangements may be applied.
  - Commitment approach elements:
    - Derivatives: sum of equivalent positions in underlying assets after netting and hedging
    - SFT: market value of collateral received (including cash) when reinvested
  - VaR methods:
    - Relative VaR: portfolio VaR limit is twice VaR of unleveraged reference portfolio.
    - Absolute VaR: risk limited to maximum of 20% of NAV; specific requirements on confidence interval, holding period and effective observation period.
- AIFMD: two methods required — commitment method and gross method.
  - Commitment method elements:
    - Direct positions: Accounting value
    - Derivatives: Sum of market value of equivalent position in underlying asset (after netting and hedging)
    - SFT: market value of collateral received (including cash) when reinvested
    - Reuse of cash borrowing: the higher of the market value of the investment realized or the total amount of the cash borrowed
  - Gross method elements:
    - Direct positions: absolute value minus cash equivalents
    - Derivatives: sum of absolute values of derivative positions converted into equivalent positions in underlying assets
    - SFT: market value of collateral received (including cash) when reinvested in assets
    - Reuse of cash borrowings: the higher of the market value of the investment realized or the total amount of the cash borrowed

*Source: IMF staff summary of German regulatory framework as provided in the supplied content.*

### 36.      Recommendation: No internationally agreed standard exists as yet in this area. In order

### 36.      Recommendation: No internationally agreed standard exists as yet in this area. In order 

### Depositaries
- IOSCO Standards for the Custody of Collective Investment Schemes’ Assets require regulatory provision for custodial arrangements of CIS, which may include requiring the appointment of a single custodian for each CIS to ensure certainty over ultimate custody responsibility.
- UCITS Directive and AIFMD require the appointment of a depositary for each UCITS fund and AIF.
- As a general rule, a depositary must have its registered office or a branch in the same country where the fund is domiciled; a non-EEA AIF’s depositary may be established in the AIFM home state.
- The competent authority of the UCITS member state must approve the depositary to act for a fund domiciled in that EEA state; AIFMD has no such requirement, but German law requires BaFin approval for depositaries of retail AIFs.
- Under UCITS IV, when UCITS fund and manager are in different EEA states, they must enter a detailed written agreement on information flow; AIFMD and UCITS V require such a written contract independent of locations.

### Prudential requirements
- German UCITS depositary eligibility is more stringent than UCITS IV: only credit institutions may act as depositary of a UCITS in Germany, subject to an initial capital requirement of at least EUR 5 million.
- UCITS V Directive depositary eligibility requirements are more detailed and allow member states discretion to specify further eligibility criteria.
- A depositary for a German AIF can be either a credit institution or a financial services institution licensed for limited custody business; for financial services institution depositaries initial capital must be at least EUR 730,000.
- Derogation: certain types of closed-ended AIF may engage a trustee as depositary if trustee meets personal and professional requirements (e.g., sufficient financial guarantees in the form of capital and liability). BaFin has issued a circular detailing trustee obligations.

### Depositary independence
- AIFMD and UCITS V require depositary functional and hierarchical separation from other potentially conflicting tasks, and identification, management, monitoring and disclosure of conflicts; they go beyond UCITS IV prohibition on management company acting as depositary.
- AIFMD specifically prohibits an AIF’s prime broker from acting as the AIF’s depositary unless prime brokerage and depositary functions are separated and conflicts properly addressed.
- German law adds requirements: managing directors, holders of power of procuration, and agents representing depositary may not be employees of the AIFM or UCITS management company.
- Depositary must ensure organizational and procedural rules to prevent conflicts of interest with management company; an independent unit must monitor compliance with conflicts rules.
- Many German asset managers are in same corporate group as depositary; implementation of UCITS V independence requirements will require supervisory board adjustments but not expected to cause particular industry challenges.

### Safekeeping and segregation of fund assets
- IOSCO Standards: CIS assets should be segregated from:
  - a. the assets of the responsible entity and its related entities;
  - b. the assets of the custodian / sub-custodian throughout the custody chain; and
  - c. the assets of other schemes and other clients of the custodian throughout the custody chain (unless CIS assets are held in a permissible omnibus account).
- AIFMD requires financial instruments held in custody be registered in the depositary’s books within segregated accounts and that depositaries keep records/accounts to distinguish assets held for one client from assets held for any other client and from their own assets. UCITS V will make the same standard compulsory for UCITS depositaries.
- BaFin applies prudential safekeeping and segregation requirements to UCITS depositaries: securities, certificates of deposit and deposits belonging to a UCITS must be placed in a blocked account; management company can only dispose with cooperation of depositary; depositary itself has no power of disposition except on management company instruction.
- Assets that cannot be held in custody must be monitored by the depositary on an ongoing basis; depositary agreement must require management company to promptly and comprehensively inform depositary about each transaction; depositary must maintain a list of assets which cannot be held in custody.
- UCITS and AIF depositaries are subject to same rules on delegation of safekeeping functions: financial instruments bookable on securities account must be registered in depositary books on separate accounts opened in the name of the AIF or its management company; for other assets depositary verifies ownership title and keeps records. Further segregation obligations stem from AIFMD Level 2 Regulation.
- Delegation to sub-custodian permitted only if sub-custodian separates clients’ assets from its own and from depositary assets so they can be clearly identified at all times. AIFMD Level 2 Regulation further specifies recordkeeping and identification obligations; sub-custodian cannot use assets unless it has prior consent from the AIF or the AIFM and notified the depositary.
- Delegation to non-EU third-country local entities is allowed only to the extent required by third-country law and only while no local entities satisfy delegation requirements; investors must be informed prior to investment and AIF/AIFM must instruct depositary to delegate.

### Delegation and reuse of assets under UCITS V
- UCITS V significantly enhances delegation requirements: only safekeeping functions may be delegated, subject to conditions.
- Reuse of client assets for account of depositary or another client is prohibited.

### Recommendation on segregation interpretation
- Given lack of clarity on interpretation of segregation obligations in the AIFMD when safekeeping duties are delegated, BaFin should continue to contribute actively to EU-level discussions to develop a common approach with a view to increased investor protection and reduced scope for regulatory arbitrage.

### Depositary liability
- AIFMD depositary liability requirements are more explicit than UCITS IV but enable contractual discharge of liability in case of delegation.
- Notwithstanding delegation, depositary remains liable for any loss of financial instruments held in custody; depositary must return a financial instrument identical to type lost or corresponding amount unless it proves loss arose from an external event beyond its reasonable control (force majeure).
- Subject to AIF agreement, depositary can discharge liability if written contract with delegate expressly transfers liability to delegate and makes it possible to claim against delegate.
- UCITS V aligns largely with AIFMD but is more stringent: UCITS V does not allow any discharge of liability (including for loss of assets) when safekeeping duties have been delegated; UCITS V also requires member states to ensure that, in event of insolvency of depositary or delegated third party, assets of UCITS held in custody are unavailable for distribution among creditors of depositary or the third party delegate.
- Under German law, AIFMD depositary rules are already applied to UCITS depositaries; BaFin circular includes specific rules on delegation of safekeeping, including that delegation must not transfer managing directors’ responsibility to the delegate and must not prevent BaFin from performing its functions.

### Authorization
- BaFin is responsible for authorizing firms to conduct fund management activities.
- Key elements for authorization include satisfying initial capital requirements, having fit and proper directors, and submitting an appropriate business plan.
- Before granting a license BaFin often holds meetings with managers and relevant staff and may visit premises depending on license type.
- Authorization of fund management companies is carried out by BaFin’s asset management department; informal contact before formal application is common practice to identify issues early.
- Case officers: general policy is to have two case officers looking at each firm, both in authorization and supervision stages.
- Tailored approach to registered management companies (those below AIFMD threshold): if registered AIFM manages only special AIFs, subject only to registration and reporting; if registered AIFM also manages retail AIFs, subject to broader rules including conduct, organizational requirements, and depositary obligations.

### Delegated management
- If management company delegates portfolio management to a third party, the third party must be authorized or registered for asset management or financial portfolio management and be supervised.
- Exception: for AIFMs, if conditions cannot be met, delegation may be granted subject to prior BaFin approval.
- Delegation to an entity outside the EU requires appropriate cooperation arrangements between BaFin and the third-country regulator.

### Trustees and depositaries
- BaFin approval is required for appointment (and any change) of depositaries of UCITS and retail AIFs, but not for special AIFs.
- If a trustee is engaged as depositary, evidence of financial guarantees must be provided to BaFin.

### Funds
- BaFin approval is required for fund rules of retail CIS (UCITS and retail AIFs).
- Approval must be granted within a period of four weeks after submission if fund rules meet statutory requirements.
- First step for case officer is to check fund rules against sample fund rules developed by the German mutual fund association, BVI, in cooperation with BaFin.
- For special AIFs no approval is required; a notification is sufficient.
- Two types of special fund:
  - i) general special funds, which have no limits on eligible assets;
  - ii) special funds with fixed investment rules, which have a more limited range of eligible assets.
- Sample fund rules for special funds have also been developed by the BVI.

### Approvals of Funds by BaFin in 2012–14 (Table 2)
- Source: BaFin.
- Year              Number              of              Funds Approved Breakdown by Type of Fund
- 2012 132 Retail funds only
- 2013                 29 1 Retail funds only
- 2014 87 57 UCITS, 7 open-ended retail AIFs, 23 closed-ended retail AIFs

### Foreign funds and marketing
- Foreign UCITS and AIFs can be marketed in Germany under certain conditions; distinction between funds marketed to retail investors and those to professional investors.
- EEA and non-EEA AIFs and AIFMs follow different processes.
- Funds that can be marketed to retail investors are EEA UCITS passported under the UCITS Directive.
- Non-German EEA UCITS and AIFs can be marketed in Germany pursuant to UCITS Directive and AIFMD passporting frameworks.
- Marketing of non-EU CIS to retail investors is subject to strict criteria under Germany’s national private placement regime (NPPR), including that the management company of the AIF complies with AIFMD requirements.
- Even for marketing of non-EEA CIS to professional/semi-professional investors in Germany, the AIFM should comply with most of the AIFMD.
- Germany does not permit non-EEA AIFMs to manage German AIFs.

### Cooperation arrangements for NPPR
- Use of NPPR is subject to sufficient cooperation arrangements.
- AIFMD requires cooperation arrangements to be in place for systemic risk oversight and efficient exchange of information in two cases for Germany:
  - between BaFin and supervisory authority of a non-EEA AIF when a German AIFM is marketing the non-EEA AIF; and
  - between BaFin and supervisory authority of a non-EEA AIFM and, where different, the supervisory authority of an AIF, when the non-EEA AIFM is marketing a EEA or non-EEA AIF in Germany.
- BaFin has established cooperation arrangements with authorities in main global financial centers.
- In practice relatively little activity has involved non-EU AIFMs or AIFs in Germany, so cooperation arrangements have not been fully tested.

_Italic: IMF staff report excerpt as provided in the supplied content._

### 65.      Supervision of asset managers, funds and their depositaries lies within the Investment

### Supervision of asset managers, funds and their depositaries lies within the Investment Funds Department in the Securities Division of BaFin

### Organization and staffing
- Supervision lies within the Investment Funds Department in the Securities Division of BaFin.
- The department is made up of 118 staff members split across 7 units.
- Number of management companies authorized under the KAGB – 132 – as of August 2015.
- BaFin has concluded MoUs with supervisory authorities of third countries including: Australia (ASIC); Bermuda (BMA); Canada (AMF, OSC, ASC, BCSC, OSFI); Cayman Islands (CIMA); Guernsey (GFSC); Hong Kong (SFC, HKMA); India (SEBI); Japan (JFSA, METI, MAFF); Jersey (JFSC); Republic of Korea (FSS, FSC); Singapore (MAS); Switzerland (FINMA) and USA (SEC, CFTC, FED/OCC).

### Approach to off-site and on-site inspections
- On-site inspections include routine meetings, event-driven meetings, statutory audits, routine audits and event-driven audits.
- Audits are carried out by external auditors and are often accompanied by BaFin staff.
- Frequency of routine inspections depends on an internal 12-point risk classification matrix for management companies; a similar procedure is applied to depositaries.
- Classification dimensions: quality of the firm (quality of organizational structure, management and financial soundness) and market impact (measured by AuM).
- Classification scale reaches from 3A (high impact and high quality) to 1D (low impact and low quality). The higher the impact and the lower the quality, the more frequent routine inspections.
- BaFin drew up a manual for on-site-inspections in 2012 specifying frequency of routine meetings and audits accompanied by BaFin staff.
  - Example: routine meetings with management companies with a risk classification of 1A may take place annually but at least once every two years.
  - Each supervision unit must accompany once a year at least two management companies’ routine audits.

### Off-site inspections and periodic reporting (findings)
- Off-site inspections include review of semi-annual, annual and audit reports, notices and requested data; also personal contacts between supervisory team and the management company/depositary.
- All management companies and all CIS (retail and special) are subject to an independent audit on an annual basis.
  - For retail CIS, semi-annual and annual reports as well as audit reports must be filed with BaFin and are subject to review and analysis.
  - Audit reports of special CIS are only submitted to BaFin upon request.
- Table 3. BaFin’s Periodic Inspections for the Past Three Years (as reported)
  - Year Supervisory visits and annual meetings on-site Audits accompanied (statutory, routine and event-driven)
  - 2012                                  54                                  25
  - 2013                                  96                                  22
  - 1014                                  80                                  9
  - Source: BaFin
  - Note in source: The limited number of audits in 2014 is due to the implementation of the AIFMD and the high workload it has generated.

### Thematic inspections and market surveillance
- BaFin started thematic inspections on fund managers and various types of CIS in 2012 as part of market surveillance.
- Sources of themes: national press, suggestions by BaFin’s directors or the Working Group on Risk (AGR), findings from regular supervision, review of Bundesbank CIS data, investor complaints.
- Examples of thematic inspections and topics:
  - Early investigations across all management companies on new products planned, potential new markets and accompanying risks.
  - Inspection of implementation of rules on good conduct across all management companies.
  - Inspection related to “cyber-crime.”
  - 2014: investigation on so-called closet indexing by active funds; preparation of a full thematic inspection across a limited number of management companies.
  - Late 2015: thematic inspection concerning risks of the bond market (liquidity risk, low interest rates risk, risk of rising interest rates etc.).

### Findings and recommendations on supervisory intensity and risk classification
- BaFin’s supervisory mission emphasizes limiting risks to the German financial system nationally and internationally, ensuring functioning of Germany as a financial center, preserving integrity, and protecting investors consistent with section 4, paragraph 1a of the German Financial Services Supervision Act (FinDAG).
- Recommendation: BaFin should consider stepping up the intensity of its supervisory engagement given the size and diversity of the German market, including:
  - More opportunities to carry out audits or inspections of its own or to accompany external audits on a more regular basis.
  - Broaden assessment of management company impact beyond AuM to include factors such as level of leverage (to the extent available) and extent of interconnectedness, to better capture potential systemic impact of investment funds.

### Reporting: scope, use, and recommendations
- New significant reporting requirement: AIFMD transparency reporting covering principal markets and instruments, current risk profile of the AIF, and, for substantially leveraged funds, extent to which AIF’s assets have been reused.
- BaFin started the process to receive AIFMD reports relatively recently and has not yet started meaningful analysis of the data.
- BaFin receives monthly data on open-ended funds from the Bundesbank (also provided to the ECB in aggregated form), providing portfolio composition information and enabling proactive checks during reporting periods.
- Bundesbank has recently started to include data on closed-ended funds and expects to share these with BaFin in the course of 2016.
- Derivatives reporting: Regulation on Derivatives (Derivateverordnung – DerivateV) requires yearly reports for each UCITS regarding derivatives and structured products with derivative components; for open-ended retail AIFs and special AIFs these reports are provided at BaFin’s request. Reports must list types of derivatives/structured products used, underlying material risks, purpose of use relative to investment strategy and risk profile; BaFin must be informed quarterly about number and size of outliers in backtesting.
- BaFin uses periodic and ad hoc reports to conduct thematic analysis (examples: exposure to Greek securities; currency risk exposure to the Swiss franc).
- Recommendation: BaFin should carry out more systematic analysis of information received from fund managers (directly or via Bundesbank), including:
  - Automatic flags for breached thresholds.
  - Analysis of AIFMD data received from German AIFMs to identify risks or problems as they arise, while continuing work to ensure smooth collection and exchange of AIFMD data at EU level.

### Enforcement powers and practice
- BaFin generally responds to non-compliance by stepping up regular supervision; supervision teams analyse and review suspected breaches and decide on measures case-by-case.
- More serious or numerous breaches can lead to near-term and more frequent on-site or on-the-spot inspections.
- BaFin’s enforcement powers include:
  - Revocation of a management company license for ongoing infringement of KAGB provisions.
  - Requirement to dismiss responsible managing directors and prohibition from carrying out professional activity.
  - Administrative fines for administrative offences (e.g., failure to make available fund rules correctly): penalties up to EUR 50,000 or EUR 100,000 depending on the case.
  - UCITS V implementation will increase fines, reaching as high as EUR five million.
  - General power to issue all orders necessary to ensure compliance with KAGB and issue an enforcement fine (Zwangsgeld); Financial Services Supervision Act allows enforcement fines up to EUR 250,000.
- In the past three years BaFin has not imposed any administrative fines or other sanctions.
- Recent extensive investigations over the past three years include:
  - Appropriateness of transaction fees, including a high proportion of soft commissions (e.g., commissions for broker research).
  - Illegal price agreements between a management company’s trading desk and an external broker.
  - Breach of the depositary’s duty to segregate the CIS’ assets properly.

### Systemic risk monitoring: structure, inputs, and outputs
- Securities Division established a regulatory process to monitor, mitigate and manage systemic risk as part of a BaFin-wide, cross-sectoral process; originally established in 2010 and adjusted following internal restructuring.
- Process is designed to be bottom-up and top-down with three units involved (details in Appendix 1).
- Box: Loan Origination by Funds
  - UCITS Directive prohibits UCITS from originating loans; AIFMD has no specific rules on loan origination.
  - May 2015: BaFin changed administrative practice—AIFs for which KAGB foresees no specific product rules, marketed to professional investors only, and managed by an authorized or registered AIFM are now entitled to originate loans.
  - BaFin’s decision considered national legislation/administrative practice in other Member States and EU Regulations on EuSEF, EuVECA and ELTIF.
  - The new administrative practice is due to be enacted into German law in parallel with transposition of UCITS V Directive; BaFin made recommendations on types of AIF, loan recipients, level of leverage, risk management, maturity transformation, risk distribution and minimum liquidity, advising AIFMs to adapt practices in advance.
  - Assessment: development of loan origination funds can diversify non-bank financing and reduce overall leverage; BaFin will monitor take-up and use experience in discussions on a possible common EU framework.
- Appendix I summary of BaFin internal processes and inter-agency cooperation (selected points):
  - Bundesbank set up a team under the Financial Stability Act (entered into force January 2013) for monitoring non-bank non-insurance sector and financial innovation, including investment fund sector growth/structure and macroprudential analysis; aims include improving existing data and augmenting with new data from regulatory reforms (e.g., AIFM data, closed-ended funds).
  - Risk Secretariat within securities supervision is central hub for systemic risk issues; chaired by head of unit from investment management department and staffed with 3 people.
  - Working Group on Risk (led by head of securities supervision) includes heads of securities supervision departments, Sub-Group on Risk (UAGR), international department representatives, BaFin cross-sectoral risk secretariat, and securities supervision risk secretariat; monitors systemic risks and decides on instruments to mitigate/manage risks; meets quarterly (and ad hoc as needed).
  - Sub-Group on Risk comprises working-level representatives of all securities supervision departments, international department, management assistant to head of securities supervision and the risk secretariat; identifies and discusses relevant risk issues and prepares contributions for AGR.
  - BaFin cross-sectoral level includes BaFin Risk Secretariat (chaired by head of cross-sectoral unit, staffed with 3 people) and BaFin Risk Committee (led by head of cross-sectoral department with multi-department composition); BaFin Risk Committee meets quarterly.
  - Information sources for systemic risk monitoring:
    - data analysis (internal supervisory reporting, supervisory surveys, Bundesbank data, market data);
    - qualitative and quantitative information from ongoing supervision;
    - analysis of market data by cross-sectoral economic department;
    - risk reports from ESMA, IOSCO, ESRB, IMF;
    - international working groups (ESMA, IOSCO, ESRB).
  - Outputs: BaFin risk report and a sectoral risk list that include for each identified risk issue existing/implemented regulatory measures and possible further measures or regulatory gaps.
  - National coordination: regular physical meetings quarterly between BaFin Risk Committee and Bundesbank; additional working-level contact.
  - Financial Stability Committee (Ausschuss für Finanzstabilität), founded 2013, includes Finance Ministry, Bundesbank, BaFin and Financial Market Stabilization Agency (FMSA); communication with securities supervision occurs mainly via BaFin Risk Secretariat contributions.
  - BaFin also shares views and information on systemic risk issues in EU (ESMA, ESRB) and international (IOSCO) working groups.

*GERMANY — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16193.pdf_