As to the proposed approach to the treatment of funds, we note as follows.
I. Prudential framework approach
We agree that entities, which are subject to an appropriate prudential framework, including sector-specific prudential frameworks deemed to cover for risks posed by bank-like activities of the entity, can be excluded from the scope of the definition ‘shadow banking entities’. We thus fully understand and support the exclusion of prudentially regulated banks, investment firms, pension funds and insurers. We also understand the exclusion of UCITS funds. We do however not understand why (non-MMF) UCITS are proposed to be excluded from the scope of the definition, while (non-MMFs) AIFs are not. The prudential framework for UCITS is equally the same as for AIFs and AIFs might even be considered to be subject to additional prudential requirements compared to UCITS. We also do not understand what is, or could be, the rationale for treating UCITS differently from AIFs from a shadow banking and/or systemic risk perspective. We think that this would seriously harm the level playing field in which these funds operate. In our view, AIFs should be equally left out of the definition of shadow banking entities for the same reasons.
II. Systemic relevance approach
We note that in the Netherlands, it is common practice for pension funds to bundle their assets via a collective investment vehicle structure, which is specifically set up for pension funds by a dedicated asset manager controlled by one or more of the pension funds. Such asset pooling vehicles are created primarily for purposes of efficiency and economy of scale. These asset pooling vehicles take the form of AIFs within the meaning of the AIFMD and the dedicated asset manager requires an AIFMD license.
The asset pooling has various advantages for pension funds, including reduction of costs, reduction of risk, benefits of scale and additional opportunities for diversification to achieve a higher yield on the investments. Pension funds do not create or pose the risk to global financial markets, are highly creditworthy, effectively unleveraged, and not involved in significant maturity/liquidity transformation. Considering the fact that no other clients than pension funds are allowed to invest in the pooling vehicles, it would be logical to use a ‘look through principle’ as for any systemic relevance tests, including any shadow banking measures. This is particularly relevant, when the AIFs and/or AIFMs are part of the same legal group as the pension fund and included in the same consolidation.
We outline this structure, to illustrate that in any and all cases, an actual systemic relevance test should be performed - thus also in relation to the use of shadow banking related products or techniques. In our view, this test should be embedded in the shadow banking framework as well. Also do we think the risk of ‘runs’ on the fund should always be taken into account. We note that in contrast to banks and other systemically important financial institutions, pension funds do not have shareholders and are not subject to ‘runs’ on the fund because pension scheme members cannot simply withdraw their funds. Plan members are not permitted to withdraw their money before retirement (and can only transfer their accrued pension benefits to another pension institution when they move to another employer). Therefore, pension funds cannot suffer from overnight runs. As for the AIFs forming a part of the asset pooling structure, liquidity management tools have been put in place.
All in all, an additional approach could be to exclude the funds/ AIFs forming a part of these kinds of asset pooling structures from the definition of ‘shadow banking entities’. In this context, we refer to the definition of ‘pension schemes arrangements’ as defined in article 2 (10) of the EU Regulation No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. This definition of pension schemes arrangements includes the described dedicated asset pooling vehicles of pension funds and is defined as “institutions for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC, including any authorised entity responsible for managing such an institution and acting on its behalf as referred to in Article 2(1) of that Directive as well as any legal entity set up for the purpose of investment of such institutions, acting solely and exclusively in their interest”. Said (extended) definition could be used in the context of excluded shadow banking entities as well.