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Annex IV reporting: the challenges of a moving target

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There is no experience as the one gained in the front lines. The fund industry struggles with changing regulation, and those companies whose business model is based on providing reporting services know best that the devil lies in the detail. The following are a number of observations after 12 months of report production and filing of the Annex IV Transparency Reports of AIFMD.

During the preparation phase, KNEIP, one of the industry’s long-standing legal and regulatory report providers, has learned a number of lessons that it is applying to ensure that the filing process becomes as hassle-free for managers as possible; in particular non-EU AIFMs who continue to rely on private placement.
 
“The first point is the number of data sources that are required. It was not a surprise to us that clients didn’t have all the data available in one place. It is all over the place and in different systems at the administrator, the prime broker, the custodian, in risk systems etc. This required us to build an interface to our clients to collect all this different data,” says Mario Mantrisi (pictured), Senior Advisor to the CEO and Member of the Executive Board at KNEIP.
 
A second challenge relates to the nature of the data. Certain fields required by the Annex IV reports were not easy to interpret. In recent weeks, however, ESMA has provided additional clarification, with some surprises.
 
“As was known, non-European AIFMs will have to report country by country depending on where they privately place their fund(s). A US manager targeting the UK and the Netherlands, for example, will have to report to both regulators. The surprise is that ESMA has said that to determine the frequency of reporting—which depends on the AuM of the manager – a consolidated AuM position must be taken. That US manager might have EUR500m in the UK and EUR500m in the Netherlands, which ordinarily would equate to two Annex IV reports a year. However, an aggregate AuM of EUR1bn means that the frequency of reporting becomes quarterly rather than semi-annually,” explains Mantrisi.
 
Also, all data on positions in the fund will need to be in notional value. This already applied to derivatives but it will now include traditional securities. “Often the market value and notional value of those securities is the same however there are some instruments where these values differ; e.g. convertible bonds. Another challenging issue is that ESMA is asking for Value at Risk (VaR) numbers to be reported. I understand that some managers do not use this parameter so they will need to start using it for the Annex IV report. This adds another layer of complexity to the data for some managers. This becomes not a data collection issue but a data management issue.”
 
Another challenge that KNEIP is helping clients overcome is that the Annex IV reporting XML standard is not the same for every European regulator. The UK is a case in point. Its regulator, the FCA, insists on the very first version of Annex IV—issued in 2013—and that it has to be used, even though an updated version was released earlier this year. This is an added burden for those managers who are filing in different jurisdictions including the UK as it means they need to manage more than one version of the report.
 
“Also, the delivery mechanism of how to deliver the report varies from country to country. Some regulators have their own proprietary system, such as the UK with Gabriel, others, such as Luxembourg impose their secured encrypted channels. Many countries, however, still rely on the use of an FTP (File Transfer Protocol) server. Considering the different varieties of transmission mode, this is another real challenge to overcome.
 
“We suspect that ESMA will come up with additional amendments to Annex IV so managers have to be prepared to understand that this is a moving target,” adds Mantrisi.
 
Over the last 12 months KNEIP has built up a dedicated team to produce and file Annex IV reports on behalf of its clients as newly registered AIFMs come to grips with transparency reporting under AIFMD. It is the first firm to handle both aspects of the process: production and filing. The company is currently working with around 40 clients as they prepare their first filings at the end of October, and many more for the upcoming January filing, according to Mantrisi. “Our teams are very flexible and work hard to ensure all the data is coherent and accurate; and that requires close liaison with managers. It’s a comprehensive solution.”
 
The company has a team of 15 staff dedicated to its Annex IV solution and 10 people in IT making sure that all the data interfaces are in place.
 
Whilst the information contained in Annex IV reports is not made public, managers should also be aware of investor disclosure requirements under AIFMD. The Directive specifies that a certain amount of information must be given to investors before they invest on areas such as investment guidelines, leverage, past performance etc. However, what the Directive does not mention is how to disclose this information.
 
One of the options is that managers produce a KIID-equivalent document similar to that used for UCITS funds. The KIID is a pre-contractual document so it has to be up-to-date at the moment an investor enters the fund. With respect to this investor disclosure information within AIFMD, not only must it be updated, but in addition the manager has to mention in their annual report the material changes made to this information.
 
“Therefore, there’s an on-going maintenance aspect to the annual report that is not the case under the UCITS regime”, confirms Mantrisi. This is something that a lot of managers overlook at the moment.
 
As Mantrisi concludes: “Managers should be careful not to underestimate the nature of this investor disclosure information and how to maintain it. Although transparency reporting under Annex IV is clearly important, they shouldn’t overlook the investor disclosure requirements.” 

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