Last week Hedgeweek attended an update on the AIFMD hosted by Bovill, the financial services regulatory consultants, following ESMA’s second consultation into the implementation of the Directive. ESMA’s first consultation paper closed 13 September. Its final advice on the back of these two consultations will be delivered to the European Commission on 16 November 2011.
The AIFMD still has areas of opacity which ESMA hasn’t necessarily resolved in these consultations, particularly with respect to the third country issue. It will affect any AIF that does not require authorisation by the UCITS Directive, and according to Caroline Gibbs (pictured), Principal of Bovill, ESMA is trying to align the requirements of AIFMD with UCITS and MiFID.
Gibbs pointed out that there will be De minimus exemptions from the AIFMD, however: news that some smaller hedge fund managers will no doubt welcome. The exemptions will apply twofold: firstly to any AIF whose AUM net of leverage does not exceed EUR100million. Secondly, to any AIF whose AUM does not exceed EUR500million, employs no leverage and has no redemption rights exercisable during a five-year period following the fund’s date of initial investment.
Gibbs added the following caveat: “It doesn’t completely exempt them from the AIFMD. Some requirements will still apply to those AIFM that qualify for exemption.”
The consultation papers add that AIFM will be required to provide certain information on an ongoing basis – typically this will include details on investment strategies, trading instruments, exposures etc. “The information that the AIFM will have to provide will be very much fund-focused. This comes straight from the Directive,” Gibbs told Hedgeweek via phone.
Fund managers that qualify for exemption could, if they wish, choose to opt-in and be subject to the full requirements of AIFMD with the obvious advantage being that they could use the marketing passport. Whether this will be a strong enough incentive is debatable.
Some of the main provisions that ESMA addressed in the first paper included: authorisation, capital requirements, AIF valuation, depositaries and marketing.
Most people have been looking at the capital requirement provision in the Directive said Gibbs: “The capital requirements for internally managed funds are higher – the base requirement (called initial capital requirement) is EUR300,000 compared to EUR125,000 for externally managed funds.”
The key point on fund valuation is independence, either from the hedge fund itself through the use of third party administrators or from the portfolio manager. The fact that the AIFMD leaves this option open to the fund manager is perhaps a little surprising and has left some market commentators scratching their heads.
Gibbs said that the paper provided no real guidance on how to calculate AUM. As to the frequency and date when assets should be valued, ESMA’s advice is that it be done on an annual basis, proposing a date of 31 December: however, different funds have different year-ends so that’s not ideal. One solution could be to allow fund managers to select their own AUM valuation date.
For exempt fund managers, if AUM temporarily exceeds the threshold they will have to justify why to the relevant authority and prove after three months that AUM has indeed fallen back below the threshold. There will therefore be greater emphasis on getting the right procedures and processes in place to monitor AUM on a quarterly basis under AIFMD.
ESMA recommends that liquidity stress tests under both normal and exceptional circumstances be undertaken annually. For due diligence purposes, an AIFM will be required to set down investment processes, investment decisions and the details of board meetings in writing for greater transparency. It also suggests that a business plan be put in place for each AIF although as Gibbs said: “They haven’t stated under what circumstances you’d actually need a business plan.”
Probably the most contentious part of the Directive is the role that depositaries will be expected to play. AIMA has already expressed its concerns that the liability costs potentially transferred to managers could amount to USD6billion.
Some of the duties that appointed depositaries will be saddled with will include: cash monitoring, safekeeping, due diligence and segregation. The problem here is how you define “safekeeping”. ESMA has put forward two options based on whether a depositary holds assets or controls them. “Firstly, that they should safe keep assets if they are held in their own name. The second option is that if they have the right to transfer assets they should be responsible for the safekeeping of such assets. It’s all about which sub-set of the assets they’re responsible for safekeeping: what assets do you hold, what assets do you control,” explained Gibbs.
Details remain fuzzy regarding the third country passport issue which isn’t due to be implemented until 2015.
“I think the main point to come out of the consultations is that there’s still a long way to go. There’s some good guidance but it doesn’t address certain issues far enough,” said Gibbs.
