The legislative proposal Level 2 draft of the EU-wide AIFM Directive was released at the end of May, and it looks increasingly likely that hedge funders are going to bear the financial brunt of appointing a depositary bank. Under the Directive, each AIFM will need to hold all of an AIF’s financial instruments in custody, with no exceptions made such as assets used for collateral arrangements.
Speaking to Hedgeweek at Gaim International 2012, Jeff Campbell (pictured), sales and relationship manager in the institutional investor segment at BNP Paribas Securities Services, said: “Managers should definitely be concerned as both the liabilities and direct costs at depositories will increase as a consequence of the legislation; it’s unrealistic to expect these costs to be absorbed by the depository banks.”
Rather than upping fees, BNPSS’s view is that managers and their depositaries should review their relationship on a more fundamental basis. “For example, the structure of the fund’s accounts, where and how they are maintained, the use of the depositary for OTC valuation, risk reporting and collateral management, coupled with cash and asset protection can have a material bearing on the cost of the overall control framework,” said Campbell, adding that if discussions were to be elevated to a “more sophisticated level” it could mitigate the direct financial impacts of using depositaries.
Prime brokers will have to ensure that they share with the depositary the total value of assets held in the AIF, cash margin positions, short sales cash proceeds, etc. Campbell thinks this might create closer partnerships between primes and depositories “but what will be more interesting is the way in which sources of financing will diversify. We see this driven both by regulation, and banks’ ongoing deleveraging of their balance sheets.”
The time is nigh for people to adapt if they wish to continue to prosper in Campbell’s opinion. “We genuinely believe that we can design intelligent solutions that will allow funds to be able to access markets and deliver alpha to their investors. The times of either pretending that the legislation will not come into force or will be weakened are past – we must come together to work this out.”
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