October 22, 2014 – By: Ralf Menegatti, Product Owner Asset Management, EMEA
The work fund managers have done to comply with the Alternative Investment Fund Managers Directive (AIFMD) will be put to the test on 31 October, when they have to submit their first reports to regulators. It is clear that many will struggle to meet the European Securities and Markets Authority’s (ESMA) requirements, which present both significant data collection and data transformation challenges.
To comply with AIFMD, fund managers must source between 400 and 800 data items, depending on the type of fund in question. This task is particularly complicated because the data is spread across multiple legal entities – risk data at management companies, operational data at fund services companies and so on.
At present, I believe about 30% of the required data has not been integrated into the systems used by fund administrators. This means they will be relying on cumbersome, error-prone, manual workarounds until they properly enhance their systems.
While data collection and the management of new data create issues, what really makes AIFMD reporting complicated is the data transformations involved. Once they have found a way to source the 400-800 data items needed for AIFMD, fund administrators must transform them to fill the 340 fields in their reports to regulators. They must also produce analysis of the data, such as charts that show in which geographical areas and countries they have investments. This is something new for the industry and requires a sound data governance framework.
Given the complexity of the data transformations required for AIFMD, fund administrators should appoint specific report coordinators to work with the data owners who are responsible for particular data fields. The report coordinators have an important role to play in overseeing the sourcing of data from multiple source systems, ensuring all of the necessary data is collected in a timely manner. To help them establish a clear governance framework like this, fund administrators need technology that allows them to define and assign tasks to individual users.
Alternative investment fund managers (AIFMs) can outsource the creation of their AIFMD reports, but they remain responsible for reports that are created on their behalf. Therefore, AIFMs that come up short on 31 October must act quickly to make the necessary improvements to their systems and data governance programs before the second round of reporting in January.
For most fund managers and administrators, the beginning of reporting will be the culmination of months and even years of preparatory work. AIFMD has completely transformed the alternative investment funds industry as we know it. It is worth taking a moment to reflect on some of the most significant changes that have been ushered in by the directive.
To start with, AIFMD has required management and fund services companies to make important structural changes. As part of the directive’s substance requirements, fund managers have had to appoint at least one conducting officer and one independent risk manager. They have then had to segregate risk and portfolio management from their fund services company and their custodian in order to avoid conflicts of interest. These set-up requirements are strictly controlled by regulators and are subject to legal contracts.
Fund managers will also have to move away from the complicated, multi-jurisdictional organizational structures they have often favored, as these become too costly and difficult to manage under AIFMD. Until now it has not been uncommon for a fund manager in Jersey to use the services of a sub-custodian bank in London and a depository bank in Paris. However, requirements for greater transparency make this type of set-up too risky and AIFMD now specifically requires fund managers to use a depository bank in their own country of domicile.
As part of AIFMD, fund managers have been required to not only put in place new risk management and liquidity risk management measures, but also to make sure they can demonstrate the efficacy of these measures to regulators. For the first time, fund managers must be able to show an external body that they have sufficient liquid assets to continue operating as normal during times of stress and that the fund is being managed as outlined in its prospectus.
When fund managers submit their first reports at the end of the month, they will be doing so to show that they have made all of the changes I have described. I believe some smaller funds and offshore funds that only market their products in Europe may have underestimated the extent of the structural changes they need to make in order to fulfill their reporting obligations. As a result, they may be at risk of losing their authorization to market their products in Europe.
For the best prepared fund managers, 31 October represents the finishing line in a long and difficult race. However, for their less well prepared peers, it appears there is still some way to go.
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