Alternatives regulation to drive wave of reporting data, suggests State Street

The large number of new regulations hitting the alternative investment sector in coming years will lead to significant growth in the amount of data flowing between companies and regulators, and between regulators, according to an outlook from State Street experts on regulation and alternatives.

Sven Kasper, director EMEA Regulatory Industry and Government Affairs, and Keith Burman, senior managing director Private Equity & Real Estate in Luxembourg and Ireland, said this wave of data would be one of the outcomes as regulations such as AIFMD, MiFID II, Solvency II and Fatca took hold in the industry.

Driving this is the sheer scope of new regulations in the pipeline. They estimate that the full body of regulations – developed in the wake of the financial crisis and collapse of Lehman Brothers in 2007-8 – will take a decade to implement, meaning it will be 2019 before the process is complete. They currently peg the ending of the period of new regulatory developments as the final implementation of the Basel III Accord.

By then, provisions such as reporting requirements placed on Foreign Financial Institutions in the US Fatca legislation, as transposed into law in European jurisdictions, mean that the volume of regulatory reporting done by financial services companies has the potential to increase considerably from current levels.

The flow of reporting data is also set to increase between regulators themselves. This is foreseen because of the recognition of the piecemeal responses to the financial crisis in its initial stages, and which is seen as a contributing factor behind its spread. Kasper and Burman identify the September 2009 G20 meeting in Pittsburgh in the US as a watershed in terms of the global commitment to a consistent approach to handling the crisis.

This meeting is particularly important in terms of the move to change regulations of alternative investments, but it did not take place until about a year after the collapse of Lehman Brothers, and a couple of years after the credit crunch started to hit liquidity in the financial system.

The sharing of data between regulators will not happen on just an intra-European basis either; the EU, US, Japan and other markets are likely to increasingly talk to each other in order to avoid any build up of systemic risk – as seen under the light touch regimes previously supported by organisations such as the UK’s Financial Services Authority.

State Street identifies a number of areas of regulatory changes that will impact the alternative investments sector. These include:

   – The AIFM Directive, which will increase liability of depositaries,
Ucits V, which will affect remuneration and sanctions,

   – The Venture Capital Funds Regime, which harmonises regulations for VC funds and managers below the AIFMD threshold,

   – Shadow Banking, which may affect ETFs, money market funds, and securities lending/repos,

   – Restrictions on short selling, and the impact of MiFID II on pre/post trade transparency, trading venues, algorithmic trading, client classification and execution only regimes,

   – The introduction of mandatory clearing of standardised derivatives contracts,
CRD IV, which will implement Basel III capital and liquidity rules in the EU,

   – Solvency II, which will introduce risk based solvency requirements for insurers,
Corporate governance, with expectations the European Commission will push ideas around shareholder engagement,

   – Changes to pensions rules in the EU, which would predominantly affect the second pillar of pensions, or occupational pensions.

One outstanding question in all of this is the degree to which costs will increase for those businesses affected, particularly alternative investment fund managers. Given that many of these changes are yet to be fully implemented, there is still no firm idea on just how much more costly it may be by the end of the current decade to continue offering management services.

Regulations affecting Europe through 2015 and beyond
Ucits V
Shadow Banking
Mad II/ Mar
Solvency II
Source: State Street


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