As January 1st 2016 approaches and regulations such as BCBS 239 and Solvency II come into force, bringing with them considerable data management demands, other more seasoned regulations, among them the Alternative Investment Fund Management Directive (AIFMD) that took effect in 2013, continue to pose data management challenges.
AIFMD was introduced by the European Union as a result of the 2008 financial crisis and aims to counter credit risk issues that contributed to the crisis by ensuring alternative investment fund managers (AIFMs) have a good understanding of their exposure to counterparties and can demonstrate robust processes for valuing assets under management. The regulation applies not only to AIFMs, particularly hedge funds, but also to the service firms that service their funds. While many AIFMs have completed most of the data management work required for AIFMD compliance, challenges remain around sourcing data codes and classifications, scale and transparency, price challenges and reporting in line with Annex IV of the regulation.
To find out more about the data management issues of AIFMD and approaches firms are taking to resolve them read ‘Meeting the Data Challenges of AIFMD’, a recently published A-Team Group White Paper sponsored by Thomson Reuters.
More information on the regulation can be found in the third edition of A-Team Group’s Regulatory Data Handbook.
The valuation element of AIFMD requires firms to establish appropriate and consistent procedures to allow for the independent valuation of a fund’s assets. The valuation must be performed either by an independent third party or by the asset manager, provided there is functional separation between pricing and portfolio management functions.
To facilitate regulatory monitoring of systemic risk, AIFMs must register with national regulators and provide disclosure on their risk management systems and investment strategies in order to present a clear picture of their capabilities. The regulation also introduces a number of capital requirements for firms acting as third-party administrators to which funds can delegate responsibility.
Perhaps one of the most challenging data management aspects of the regulation is Annex IV, a broad and prescriptive transparency reporting requirement that must be fulfilled by AIFMs. The annex comprises more than 40 questions, requiring managers to provide information including instruments traded, exposures, assets under management, liquidity profiles, a breakdown of investments by type, geography and currency, and stress test results.
The reporting frequency for Annex IV is determined by assets under management. Firms managing between €100 million and €500 million must file Annex IV reports annually, while those managing between €500 million and €1 billion are expected to file on a semi-annual basis, and those running in excess of €1 billion must submit reports on a quarterly basis.
Gavin Murray, senior product manager, regulatory reporting and compliance monitoring, HSBC Securities Services, explains: “For AIFMD Annex IV reporting, an AIFM requires a data management solution that consolidates data from multiple internal and external sources, verifies the data content and coverage, and ultimately files returns with the regulator in the appropriate specified format.
“While we considered the provision of such a data management service as part of our third-party administrator offering, it was clear that there were a number of vendors in the market already providing services and we took the decision that this was an area best served by dedicated data management solution providers, given the bespoke nature of AIFMD data consolidation and reporting. Given the fact that there will only be an increase in regulatory regimes and associated reporting, the potential market for these providers can only increase going forward and an easily configurable data management solution that can accommodate these multiple requirements would look to be the best solution.”
While AIFMD has been in place since 2013, recent discussion around the regulation considers whether its passport system, which allows fund managers and funds registered in one EU state to market products to other member states, should be extended to non-EU AIFMs and alternative investment funds. In July 2015, the European Securities and Markets Authority (ESMA) published its advice in relation to the application of the AIFMD passport to non-EU fund managers and funds. ESMA’s initial advice suggested the passport could be extended to Guernsey, Jersey and Switzerland, but it cautioned that extending the passport to only a few non-EU countries might have an adverse market effect. This advice was sent to the European Commission for consideration and a response was expected by the end of 2015, but this has not yet been forthcoming.
Meantime, ESMA is looking at the possibility of extending the passport further afield. It is continuing an assessment of Hong Kong, Singapore and the US with a view to reaching a conclusion on whether to extend the passport to these countries, and is starting to assess a second group of non-EU countries, namely Australia, Canada, Japan, the Cayman Islands, the Isle of Man and Bermuda. Again, advice from ESMA on these countries will be put before the European Commission for final consideration and decision making.
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