As one AIFMD-related deadline hits, the industry is still likely a year away from tackling compliance and reporting for this regulatory overhaul. But that doesn’t mean firms shouldn’t start preparing today.
After being bandied about for quite some time, the broad-ranging Alternative Investment Fund Managers Directive (AIFMD) goes into effect today—sort of—as members of the European Union (EU) will have to have the directive written into national law.
While nations and firms are technically supposed to be in compliance starting today with AIFMD—and mandates around depository liability and risk reporting—there’s a grace period that most jurisdictions will likely take advantage of, according to Keith Hale, executive vice president of client and business development at Luxembourg-based Multifonds. A recent survey conducted by the portfolio accounting solutions provider found that 88 percent of asset managers surveyed said they would take advantage of the grace period, which allows firms to wait until July 2014 to convert from their national vehicle to AIFMD.
Similarly, a recent survey conducted by BNY Mellon found that over half of respondents had project teams already in place to deal with the issue, even though 73 percent don’t expect to apply for authorization before 2014. And compliance is expected to be costly. “As the industry comes to terms with the implications of a heightened regulatory environment, respondents believe that initial AIFMD project/one-off costs will range from between $300,000 to over $1 million per institution,” according to the report, with reporting challenges accounting for the bulk of the focus.
All About the Data
On its face, AIFMD is very similar to that of Form PF in the US, which was spun out of the Dodd–Frank Act. The greatest IT-related challenges are largely three-fold: data aggregation, data warehousing and regulatory reporting.
AIFMD, which was created to allow regulators to examine for systemic risk among alternative investment managers and to restore investor confidence into alternative investment funds, asks for information on accounting data, data on investor concentration, risk information, in addition to disclosures to investors and conflict of interest oversight, due diligence procedures, and defining risk management policy.
“It’s a question-and-answer type of report,” says Bruce Runciman, senior vice president at AxiomSL. “You don’t want to give more than they are asking for, and you don’t want to answer incorrectly or incompletely.”
All of that information, as it stands right now, has to be delivered via an XML report.
“The reporting is significant challenge,” says Multifonds’ Hale. “If you’re small, doing an XML-formatted report to send to the regulator is a pain in the neck, as opposed to Microsoft Excel or a Word document. For a larger hedge fund or administrator, then it’s more of a challenge around automation, and that’s where the warehousing comes in.”
Sylvain Privat, head of buy-side products at Misys, says buy-side firms will have to rethink their organization and governance, their operational and risk process, as well as their relationships with third parties. “This is especially true for all firms that were not running Ucits funds,” he says. “For them, the regulatory demands in term of reporting and risk management will be a major overhaul. The two main impacts on alternative managers from an IT standpoint are the increasing reporting requirement and the obligation to have an adapted risk management system. Firms must identify the material sources of risk for each fund and manage or mitigate market risk, credit risk, liquidity risk and counterparty risk, which includes having limit monitoring and breach remedial procedures.”
Outside of Europe
AIFMD isn’t just directed at European funds. Any firm that looks to establish a fund in a member state in Europe must comply with the rule. This creates some difficult reconciliation. For instance, Axiom’s Runciman says asset under management (AUM) is calculated differently in Europe and in the US. “You have to decompose your derivatives into their component pieces and value them at market, as opposed to taking the notional value of those derivatives and adding them to your AUM calculations,” he says.
US asset managers that have already dealt with Form PF reporting or CPO–PQR reporting may have an advantage, as they’ve had to aggregate similar sets of data, warehouse that data and report that data. Still, a lot of uncertainty still exists.
“I’d say most of the firms in the US have taken a tact that they’re going to do some sort of reporting, or are preparing to do the reporting,” Runciman says. “In Europe, there’s a window for you to register—a one-year window under Article 61 of the directive—that allows you to register. Many of the National Competent Authorities are allowing the European Union funds to register over this next year and then start their reporting and compliance subsequent to that registration date. I think that is a little bit confusing if you’re not registered already. If you are registered already, then you have to comply now; if you’re not registered or are seeking a new registration, then there’s a window of compliance where you’re expected to comply within this one-year window.”
The Bottom Line
- As always, while these new requirements will prove challenging and create many a headache, the investors will force firms to get into compliance, or risk having those investment dollars go elsewhere.
- “The objective of the regulator is really to create a label of quality on alternative funds,” says Misys’ Privat. “This new AIF brand aims to restore investor confidence and create a more efficient and transparent common market on alternative strategies.
- According to the BNY Mellon survey, 62 percent of respondents say investors will keep their money in AIFMD-monitored European-domiciled funds, rather than invest in jurisdictions with less onerous