AIFM Directive to enhance hedge fund governance through reporting and valuation demands
“Our philosophy is to try and assist our clients to meet the requirements of the Directive with minimum cost and minimum disruption,” states Des Pierce (pictured), Director of Strategic Markets at SS&C GlobeOp, in reference to the upcoming AIFM Directive, due to go live on 22 July 2013.
At the heart of the Directive is the enhancement of investor protection and transparency of alternative investments. Whilst there is already a degree of oversight on European-domiciled funds, the Directive goes beyond the requirements currently in place and, indeed, beyond what is currently in place for UCITS funds. Offshore funds that previously avoided the glare of regulatory oversight will now be under its spotlight.
Most established managers will have a year to prepare themselves to become compliant – assuming they manage an AIF already – but new managers will need to become compliant from the get-go.
“What we hear from many of our clients is that they are ramping up their focus on the Directive with a view to later this year starting the application process to become authorised from Q1 next year. I would say the majority of our UK clients expect their UK entity to register to become the AIFM,” says Pierce.
SS&C GlobeOp, one of the industry’s leading hedge fund administrators, combines technology expertise with long-standing administration expertise to make managers’ lives as easy as possible in becoming AIFMD compliant. It is “AIFMD ready”, offering clients solutions that cover valuation, depositary, reporting, and risk management.
Two key elements to the Directive relate to the reporting process, and valuation. Managers must ensure that they have the right processes and controls in place to file accurate reports, and populate those reports in a consistent and scalable manner.
Reporting under AIFMD
This is already underway in the US with managers having to file Form PF with the SEC and there is likely to be a lot of overlap, in terms of how managers file their reports under the Directive. Given that SS&C GlobeOp has been supporting its clients with Form PF filing over the past 12 months, it is able to leverage its experience to now support European managers under Annex IV of the Directive.
“We’ve developed proprietary technology for a regulatory solutions portal. We offer a number of reporting products for Form PF, FATCA, CPO PQR, OPERA, and now also an Annex IV AIFMD product,” confirms Pierce.
“A lot of people are drawing comparisons with Form PF which, for a lot of our clients, turned out to be a lot more labour intensive than originally anticipated. We heard clients estimating that it would be in the region of 40 to 50 hours work per filing, and it ended up being 10 times that amount. There is now a realization among managers that trying to perform regulatory reporting in-house requires substantial resources in an area which isn’t a core competency and as such we’ve seen interest growing in our regulatory reporting solution.”
Final guidance on the reporting requirements is not expected to be released by ESMA until the end of 2013, but SS&C GlobeOp is not wasting any time. While some degree of overlap with Form PF is inevitable, there will undoubtedly be differences. Different methodologies will be required to present the data. Whatever the final guidelines happen to be, one thing is clear: there will be a lot of work involved and managers will not want to be burdened with getting their reporting capabilities in order and spending endless hours producing the reports.
“We offer multiple service options to clients. We can deploy a software solution that they can use in-house, or provide a full-service solution whereby we will perform the calculation, aggregate data from the manager and potentially other third party sources, to comply with the reporting requirements of the Directive,” says Pierce.
Should there be gaps in the data needed for reporting, SS&C GlobeOp will work with its clients to highlight what is missing and retrieve it, although Pierce estimates that they probably already have approximately “85 per cent of the data required” where the client avails of a full service.
One potential challenge under the AIFM Directive is that individual Member States may have their own individual requirements and potentially insist on the reports being submitted in their local language. Hopefully this will not arise, but should it happen, SS&C GlobeOp’s reporting solution is flexible enough to incorporate local regulator nuances.
Valuation and good governance
SS&C GlobeOp has developed an AIFMD-compliant valuation policy for its clients. Having strong governance around the valuation process is essential. This is something that managers will need to address over the next 12 months; particularly managers who are running strategies that use complex instruments which may not necessarily be easy to value.
“We are upgrading our valuation policy template to make it AIFMD-compliant with reference to the various articles in the Directive where valuations are referenced. Our systems are very transparent in terms of the methodology used to perform valuations for all assets including OTC products.
“Our intention is to run through the valuation policy template with our clients on an asset class basis to confirm which pricing source(s) they use. We will help clients to implement the policy and, if necessary, carry out the valuation process for them.”
One of the ambiguous elements to valuation under the Directive is that it fails to stipulate exactly who should do the valuation – it is open to interpretation, meaning that either the manager, or an independent third party, can perform the task. But accuracy will be paramount given the potential changes in liability whereby the valuer cannot limit its liability for losses arising from negligence.
As such it is not something to treat lightly.
As Pierce comments: “Today we already perform OTC valuations for clients, we aggregate prices for some asset classes and we calculate the NAV. We don’t intend to change the services we deliver or how we deliver them. We want our clients to have a valuation policy that is AIFMD-compliant, and as much as possible we want to maintain business as usual. Anywhere we can minimize disruption and cost to our clients, the better.”
One interesting point that Pierce makes relates to the use of depositaries under the Directive for non-EU funds. Articles 21.7, 21.8 and 21.9 refer to cash flow monitoring, the safekeeping of assets and oversight respectively. It is being described as “depositary lite” because unlike EU funds, a chosen depositary will not have strict liability around the safekeeping of assets.
Two models are now emerging: the first is where a single depositary fulfills the full requirements under the Directive. The second involves a number of different parties fulfilling different aspects of the depositary function. This is good for hedge fund managers because it could help minimize costs.
“The impact may mean that it is less disruptive to the client as their existing service providers can, collectively between them, fulfill the depositary requirements. It will avoid a lot of the duplication and as a result minimize cost. However, we will be fully supportive of both models and we will use our GoDepositary platform for the efficient exchange of information with depositaries.
“There is still a lot of uncertainty so the early adopters will help shape how the Directive will be implemented, and we’ll be committed to helping clients minimize disruption to their existing operating models and finding practical solutions,” concludes Pierce.
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