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Regulation drives wider range of reporting solutions

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With the Alternative Investment Fund Managers Directive (AIFMD) which came in force last July 22, together with the introduction of the European Market Infrastructure Regime (EMIR) and Foreign Account Tax Compliance Act (FATCA), fund administrators are facing big challenges in terms of getting up to speed on the full ramifications of these directives.

AIFMD and EMIR in Europe represent opportunities to administrators whose level of preparedness is such that, through the identification and implementation of multiple reporting options, places themselves at the forefront to increase their revenue streams. With the right technology solutions, reports can be generated and validated to meet these European regulatory requirements.
 
Complex reporting requirements such as the ones associated with AIFMD, impose the need to identify and apply innovative and new reporting tools.
 
Joseph Camilleri (pictured), Head of Business Development at Valletta Fund Services, the fund administration arm of the Bank of Valletta, comments that Malta Financial Services Authority (“MFSA”), wisely opted to keep its Professional Investor Funds (PIFs) regime alongside the newly introduced AIF rule book that adheres to the AIFMD provisions.
 
“This provides small to mid-sized hedge fund managers that are classified as “de-minimis” the opportunity to opt out of the onerous obligations as set by the Directive, and pursue their distribution model based on private placement. This ensures that Malta’s strong position as an ideal domicile for de-minimis fund structures is sustained,” says Camilleri.
 
Having two rule books for alternative investment funds puts Malta in a highly advantageous position, enabling it to market itself to a wider fund promoter base. Coupled to this, Camilleri believes that Malta holds a compelling business case for the setting up of AIFMs to operate from Malta.
 
“The increase of AIFMs would lead to more onerous regulatory reporting requirements which will be imposed on the fund manager. “Annex IV” which is the major report to be compiled, is even more detailed than Form PF in the US. Fund Administrators are gearing themselves heftily in order to ensure that the fund managers are well supported and serviced.
 
“We have more than 120 investment services licences issued by MFSA, of which over 90 are fund management companies with an operational base in Malta. There is a mix between de-minimis managers and others well beyond the threshold (set at EUR100m), which are converting to AIFMs. Many local fund managers are subsidiaries of larger FCA-licensed UK management companies. A number of these have opted to convert their Malta operations into AIFMs, adopting a business model whereby the risk management activities are conducted locally in Malta, whilst the day-to-day investment management activities are outsourced to the UK-based managers that do not hold an AIFM licence.
 
“This is a business model that we envisage will grow steadily, strengthening Malta’s positioning as a domicile of choice for many operators in the funds sector” comments Camilleri.
 
The AIFMD, like most regulation, comes with relatively heavy baggage: not solely in terms of reporting obligations but also with respect to depositary services where the liability clauses on credit institutions offering such services can be onerous.
 
All of this translates into higher fund costs. It is a challenge for fund managers to ensure that the TER of their funds remains contained and costs do not spiral as they are ultimately borne by the investors. ‘’This is ironic’’, says Camilleri, considering that the Directive’s core objective “was to safeguard the interests of the investors themselves! Obviously, this would lead to lower performance results of the funds’’.
 
“In this respect VFS, early on, ensured that all the reporting requirements, especially regarding Annex IV, were fully understood. Our systems were updated and set up where necessary, in order to facilitate the smooth running and integrity of such reports. The majority of the information required under Annex IV is already held by administrators in their normal course of business. Therefore VFS is best placed to provide this reporting services to its hedge fund clients, allowing them to focus on core competencies; that is, investment management,” says Camilleri.
 
The first step VFS took in developing its reporting capabilities for Annex IV purposes was, to examine each and every line item of the template report Annex in order to assess whether the necessary data was already held in its IT platform system and, whether there was potential to populate additional data from the portfolio positions, and finally to determine which data would need to be provided by each individual fund manager.
 
As it transpired, a fair percentage of the data was already held through the portfolio positions of the funds under administration. “That was part one,” says Camilleri. “Next, we identified what other data feeds were required for which the necessary details were held in the respect portfolios yet amounted to “idle” data that was not used for the purposes of determining the NAVs of the respective funds’’.
 
“Plugging this additional information into the data repository beefed up the overall data captured, for eventual use in the compilation of Annex IV.”
 
When asked what kind of information this might entail, Camilleri states: “This may include areas like the value of turnover in each asset class, the borrowing and exposure risk, the five largest sources of borrowed cash or securities…. All such information was, as stated, available, yet untapped as not required for NAV calculation purposes.”
 
“The third and final leg was accessing additional information that was not in our possession; basically data that the fund manager has access to. We had to ensure that there was an IT interface that could effectively extract additional data from our systems and at the same time collate it with the additional data which can be produced by the fund manager. The aim is to produce a complete set of clean data, prepared in an automated fashion, which we can then file with the MFSA on behalf of the client.”
 
This reporting solution is in the final stages of being completed, so as to fully support AIFMs, most of whom will be required to make their first filing of Annex IV by 31 January 2015.
 
Unfortunately, the reporting obligations for EU managers do not end here. Back in February this year, institutions and their bank counterparts were required to start reporting financial derivative transactions made under EMIR (European Market Infrastructure Regulation). Then, on 11 August 2014, phase two of EMIR began: namely, valuation and collateral reporting, requiring both the fund manager and broker/dealer to report the valuations of all derivative transactions to an appointed trade repository at the end of each day.
 
“With respect to EMIR, VFS has been providing services to our clients that are two-pronged. On the one hand we have been registering the funds for the LEI (Legal Entity Identifier) with the London Stock Exchange, whilst on the other hand, we provide the daily reporting necessary to the relevant trade repository, which in our case is the Malta Stock Exchange.
 
The daily EMIR reporting is automatically extracted from the funds’ portfolios, (the information utilised is similar to that required for compiling Annex IV). This information is obtained from our ICON platform. As in the case of reporting for Annex IV, a few clients opt to appoint their prime broker to file said EMIR report, whilst others request VFS to generate and file EMIR reports on their behalf,” concludes Camilleri. 

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