James Williams, Hedgeweek

Deloitte and PwC respond to European Parliament’s vote in favour of variable pay caps for UCITS fund managers… Lyxor launches UCITS-compliant version of Winton Diversified Program…

UCITS funds could potentially end their securities lending programmes in response to complex regulations reported IndexUniverse.eu this week, based on the comments of one of the panellists at Markit’s recent Securities Finance forum in London.

 
John Arnesen, global head of agency lending at BNP Paribas Securities Services, reportedly said that new regulatory requirements for UCITS may force fund managers to rethink their involvement in securities lending altogether. Arnesen was quoted as saying: “For year agent lenders have struggled to convince portfolio managers that securities lending might make sense. They’re going to see even less benefit now that the share of revenues they can retain has dropped. The debate over the pros and cons of lending might now shift to fund trustees, who may think it’s too much work to evaluate.”
 
Under new guidelines for UCITS and ETFs, formulated by Europe’s securities market regulator, ESMA, fund management companies are required to declare the costs they incur when lending securities and that all revenues, net of these costs, are passed back to investors.
 
This week, the European Parliament voted in favour of draft remuneration rules implementing variable pay caps for UCITS fund managers. The rules include the requirement for a significant proportion of variable pay to be deferred for three to five years, with a cap on variable pay of one times salary.
 
Stephen Cahill, head of compensation and benefits at Deloitte, commented: “These new rules are likely to have a significant impact on the way asset managers pay their employees.
 
“Changes to pay structures could create unwelcome complexity for asset managers in the EU. The cap on variable remuneration included in both the UCITS rules and CRD4, is likely to lead to increases in salary levels across the financial services sector and will increase fixed costs at a time when firms are looking to keep them down. 
 
“These developments are likely to place the European financial services sector at a disadvantage to counterparts in the US and Asia, and will make it much harder for European firms to attract and retain their key talent.”
 
PricewaterhouseCoopers also responded to the pay cap issue this week. Jon Terry, partner in PwC’s reward team, said:If the final rules are even close to what has been agreed today, then this will fundamentally change the way asset managers are paid. Asset managers who manage UCITS products are likely to push-back on why they are now facing the toughest pay rules across the whole of the financial services sector.”
 
Terry added that UK fund management firms are set to be “disproportionately hit” by any bonus cap rules as bonuses tend to make up a greater proportion of pay.
 
“Many firms will have to completely review how they pay their fund managers and senior staff due to the large proportion of pay that would be affected by any such rules.There is a long way to go to finalise any remuneration provisions and the industry needs to make a strong and persuasive case to significantly water down these proposals or risk being stuck with onerous and restrictive rules.”
 
Finally this week, Lyxor Asset Management announced the launch of a new UCITS-compliant fund that aims to replicate Winton Capital Management’s Winton Diversified Program. Winton Capital, founded by David Harding, is Europe’s largest CTA manager with approximately USD26billion in AuM and is the world’s fifth largest hedge fund.
 
Commenting on the launch, Harding said: “We are very pleased to work with Lyxor to provide their UCITS investors with ourtrading strategy. We’ve been working with Lyxor for more than 10 years and its long and solidexperience offers investors a secure, controlled, framework available through its platform.”
 
The fund will be available on Lyxor’s alternative UCITS Platform. The strategy is based on the
assumption that in the long term, profit can be derived from the futures markets by using statistical research into market activity and as a result, research constitutes the largest area of investment in the company. Indeed, close to half of the firm’s 275 staff are actively engaged in research.
 
The fund will focus on the analysis of market prices and volumes in order to capture trends through liquid financial instruments including futures and forward currency contracts. It will be available to investors in EUR, USD and GBP share classes, as well as other currencies upon investors’ requests. Investors will benefit from the weekly liquidity and independent risk management provided by Lyxor.

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