SS&C GlobeOp’s Des Pierce discusses the firm’s Depositary “Lite” solution under AIFMD
SS&C GlobeOp, one of the hedge fund industry’s leading administrators, is currently supporting European fund managers under the AIFMD’s Depositary “Lite” regime having recently gained authorisation from the UK’s Financial Conduct Authority.
For hedge fund administrators, the ability to provide offshore depositary services to managers running non-EEA AIFs is an excellent opportunity to enhance their value proposition; and at SS&C GlobeOp, they’ve built a dedicated team for the sole purpose of running their new Depositary “Lite” solution.
Under Article 36 of the AIFMD, the appointed depositary(ies) – the Depositary “Lite” - must still perform the three core functions of cash flow monitoring, safekeeping of an AIF’s financial instruments and other assets and oversight of the AIF and AIFM. This is, as the name implies, a lighter version of the full onshore depositary model, required by European managers running EEA AIFs, under Article 21 of the Level 1 Directive.
There are clear differences between Article 36 and Article 21. As Des Pierce (pictured), Director of strategic markets at SS&C GlobeOp, explains:
“The strict liability for safekeeping of financial instruments held in custody applies only to the full depositary regime for European managers running EEA domiciled AIFs. Another key difference is the ability for one or more key firms to carry out those three core functions required of the depositary. For EEA AIFs, a single depositary must be appointed which can then sub-contract to other parties, particularly with respect to custody. But it is still one party acting as the depositary. Under the Depositary “Lite” regime, AIFMs have the flexibility to hire multiple parties.”
“There is also no specific requirement on the location of the depositary under AIFMD unless the AIFM jurisdiction specifies it. However certain jurisdictions are choosing to not even regulate the activities of Depositary “Lite” providers.”
The point that Pierce makes about using multiple parties under Depositary “Lite” is an important one. The last thing that managers want is to have their key client relationships disrupted: namely the ones they have with their prime brokers and administrators. Under Depositary “Lite”, prime brokers will be able, for example, to provide the safekeeping of financial instruments function, the administrator will be able to continue to provide its services with a Depositary “Lite” service provider additionally slotting in to provide the cash flow monitoring, safekeeping of other assets and oversight functions.
“What we’ve tried to do under AIFMD is help clients meet the requirements of the Directive without incurring significant cost or disruption to their business. As a Depositary “Lite” service provider, we can handle the majority of the requirements of the directive: cash flow monitoring (Article 21(7)), asset verification (Article 21(8)(b)) and oversight (Article 21(9)).
“We have invested in the business to provide those key aspects under Depositary “Lite”. All it means is that the safekeeping of an AIF’s assets (Article 21(8)(a)) will need to be performed by the prime broker or the custodian; whoever is holding the assets on behalf of the AIF, which better reflects the reality” says Pierce.
Indeed, prime brokers have the same opportunity to expand their value proposition and leverage their custodial capabilities (especially universal banks) under AIFMD as administrators now have by providing the oversight function.
Pierce tells Hedgeweek that SS&C GlobeOp first started to build out its depositary team towards the end of 2013. At the heart of this exercise was an aim to create an environment based on best practices. This meant establishing a team that was fully independent and separate from the rest of the administration business – something that investors particularly like to see as it helps to mitigate any potential conflicts of interest.
Right now, that team is seven-strong but as more clients start to avail of the Depositary “Lite” solution that number will grow with additional support for the senior members of the team.
Pierce says that there were two primary reasons for becoming a Depositary “Lite”:
- “When we looked at our client base we noticed early on that we had a large number of European managers (many were based in London) running non-EEA AIFs and who would therefore need to appoint a Depositary “Lite” service provider. We wanted to be able to offer a product to our client base to support their compliance with the Directive.
- In discussions with our clients, we received positive feedback on our proposed operating model and our intention to minimize disruption to the manager as well as limit the cost.
“Most managers are striving to be AIFMD-compliant, even for those that remain below the EUR100mn AuM threshold, and are now appointing a Depositary “Lite” service provider.
“Managers that continue to adopt a ‘wait and see’ approach run the risk of losing out on potential asset allocation opportunities. This is because the timing of the application process for private placement in some countries may take months”
In other words, this was too big an issue for its clients for an administrator of SS&C GlobeOp’s size and stature to overlook. Besides which, it already has an advanced technology infrastructure that lent itself favourably to getting the right processes and controls in place to offer an effective Depositary “Lite” solution.
As Pierce goes on to explain: “We always strive to utilize the excellent technology we have to develop additional services for our clients. One of the advantages to this is that we are using technology that our clients are already familiar with which gives them confidence in how our Depositary “Lite” solution will work. Clients have been impressed with what they’ve seen and take comfort in our ability to act as the depositary for their non-EEA AIFs.
“One of the key reasons for why clients are choosing our solution, therefore, is because our technology expertise has enabled us to develop a streamlined operating model. Our Depositary “Lite” model is a multi-party model whereby existing service providers (prime brokers, custodians, administrators) perform additional tasks to support the requirements of the directive.”
What this does is to eliminate the need for the AIFM to appoint additional service providers, allows for a swift implementation and retains, as much as possible, their existing operating model with limited, if any, disruption.
Another reason that puts SS&C GlobeOp in a strong position is that it has designed an efficient exchange of data between a client’s different service providers and themselves.
“For the majority of clients, the primary service provider and data provider is their administrator. What our system has allowed us to do is to have an automated exchange of information between our administration business (and other third parties) and our depositary team. This minimizes the amount of back and forth work between our team and different counterparties to identify what information is available.
“We’ve been able to link in our tasks and responsibilities with what our administration arm is already doing to minimize the operational burden on managers,” states Pierce.
Naturally this service comes at a cost. However because the operating model has been designed to avoid duplication and automate the exchange of information, “we are able to charge a competitive fee”, according to Pierce.
To date, a handful of early adopter clients are up and running on SS&C GlobeOp’s Depositary “Lite” platform. This numberis scheduled to ramp up substantially as the transposition deadline approaches on 22 July 2014 by which point European managers will have to become AIFMs.
“We have been negotiating commercial and contractual agreements with our clients since the end of 2013. There are a number of steps to initiating the Depositary “Lite” service. One of the requirements of AIFMD is that the depositary carries out a risk assessment of the AIFM and the AIF it will be working with.
“We’ve split that into two levels of due diligence: we’ve completed our first level of due diligence and we’ve completed the majority of our on-site AIFM visits as part of our level two due diligence.
“The go-live point for the majority of our clients will be on the 22 July 2014 deadline. Most managers are fully availing of the grandfathering period and are waiting until that date to go live. Our systems are set up and ready to go,” confirms Pierce.
The European hedge fund landscape is undergoing tremendous geomorphic change. Although burdensome, and operationally frustrating, it could well lead to greater asset raising opportunities for European managers as continental European institutions start to look favourably at AIFMD-compliant funds.
Pierce concludes by stating: “We are very bullish on Europe and the ability for managers to raise additional capital over the coming years under the new AIFMD brand. It’s going to be a dynamic regulatory environment over the next few years but as we’ve demonstrated by getting our Depositary “Lite” solution in place, in addition to our regulatory reporting offering, is that we are ready to meet these changing dynamics and support our clients as regulations continue to evolve.”
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