1.The exposure of an AIF calculated in accordance with the commitment method shall be the sum of the absolute values of all positions valued in accordance with [F2section 3.9 of the Investment Funds sourcebook, and all delegated acts adopted pursuant to Article 19 of Directive 2011/61/EU which form part of [F3assimilated] law], subject to the criteria provided for in paragraphs 2 to 9.
2.For the calculation of the exposure of an AIF in accordance with the commitment method an AIFM shall:
(a)convert each derivative instrument position into an equivalent position in the underlying asset of that derivative using the conversion methodologies set out in Article 10 and paragraphs (4) to (9) and (14) of Annex II;
(b)apply netting and hedging arrangements;
(c)calculate the exposure created through the reinvestment of borrowings where such reinvestment increases the exposure of the AIF as defined in paragraphs (1) and (2) of Annex I;
(d)include other arrangements in the calculation in accordance with paragraphs (3) and (10) to (13) of Annex I.
3.For the purposes of calculating the exposure of an AIF according to the commitment method:
(a)netting arrangements shall include combinations of trades on derivative instruments or security positions which refer to the same underlying asset, irrespective — in the case of derivative instruments — of the maturity date of the derivative instruments and where those trades on derivative instruments or security positions are concluded with the sole aim of eliminating the risks linked to positions taken through the other derivative instruments or security positions;
(b)hedging arrangements shall include combinations of trades on derivative instruments or security positions which do not necessarily refer to the same underlying asset and where those trades on derivative instruments or security positions are concluded with the sole aim of offsetting risks linked to positions taken through the other derivative instruments or security positions.
4.By way of derogation from paragraph 2, a derivative instrument shall not be converted into an equivalent position in the underlying asset if it has all of the following characteristics:
(a)it swaps the performance of financial assets held in the AIF’s portfolio for the performance of other reference financial assets;
(b)it totally offsets the risks of the swapped assets held in the AIF’s portfolio so that the AIF’s performance does not depend on the performance of the swapped assets;
(c)it includes neither additional optional features, nor leverage clauses nor other additional risks as compared to a direct holding of the reference financial assets.
5.By way of derogation from paragraph 2, a derivative instrument shall not be converted into an equivalent position in the underlying asset when calculating the exposure according to the commitment method if it meets both of the following conditions:
(a)the combined holding by the AIF of a derivative instrument relating to a financial asset and cash which is invested in cash equivalent as defined in Article 7(a) is equivalent to holding a long position in the given financial asset;
(b)the derivative instrument shall not generate any incremental exposure and leverage or risk.
6.Hedging arrangements shall be taken into account when calculating the exposure of an AIF only if they comply with all the following conditions:
(a)the positions involved within the hedging relationship do not aim to generate a return and general and specific risks are offset;
(b)there is a verifiable reduction of market risk at the level of the AIF;
(c)the risks linked to derivative instruments, general and specific, if any, are offset;
(d)the hedging arrangements relate to the same asset class;
(e)they are efficient in stressed market conditions.
7.Subject to paragraph 6, derivative instruments used for currency hedging purposes and that do not add any incremental exposure, leverage or other risks shall not be included in the calculation.
8.An AIFM shall net positions in any of the following cases:
(a)between derivative instruments, provided they refer to the same underlying asset, even if the maturity date of the derivative instruments is different;
(b)between a derivative instrument whose underlying asset is a transferable security, money market instrument or units in a collective investment undertaking as referred to in [F4paragraphs 1 to 3 of Part 1 of Schedule 2 to the Regulated Activities Order 2001], and that same corresponding underlying asset.
9.AIFMs managing AIFs that, in accordance with their core investment policy, primarily invest in interest rate derivatives shall make use of specific duration netting rules in order to take into account the correlation between the maturity segments of the interest rate curve as set out in Article 11.
Textual Amendments
F2Words in Art. 8(1) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 23(10)(a) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
F3Word in Art. 8(1) substituted (27.2.2025) by The Retained EU Law (Revocation and Reform) Act 2023 (Consequential Amendments) Regulations 2025 (S.I. 2025/82), reg. 1(2), Sch. 9 para. 37(b)
F4Words in Art. 8(8)(b) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 23(10)(b) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Textual Amendments
F1Words in Ch. 2 Section 2 heading omitted (31.12.2020) by virtue of The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 23(7) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)