Aifmd: You can run, but you can’t hide, says Linedata’s Isadora Pardo

Isadora Pardo at Linedata in Luxembourg has outlined key considerations when considering solutions to facilitate compliance with the Alternative Investment Fund .

Following the series of financial crises and failures, the cry for financial transparency and risk controls rang loud and clear. Regulators throughout Europe determined that broadening supervision on all financial products and participants in the financial sector would increase transparency and reduce risk for end investors. Unregulated investment structures, namely alternative investment funds, received a strong spotlight for new regulation and, in December 2012, the Alternative Investment Fund Managers Directive (Aifmd) was introduced.

A window of opportunity

Opportunities will, in fact, present themselves for those who stand tall in the face of new regulation.

Similar to the Ucits passport that was introduced in Europe in 2002, the Aifmd passport offers cross-border opportunities throughout Europe to Aifmd compliant investment funds. Additionally, the European passport and transparency improvements assist with the image of Aifmd compliant funds, establishing confidence from a broader range of investors including those outside Europe. As an example, institutional investors, such as insurance companies in Asia, have started showing interest in these investment vehicles, while, in the past, they considered these investments too risky to be part of their portfolios.

However, the compliance requirements are complex, both in term of processes and transparency. In achieving compliance, investment firms are concerned about increased costs and are searching for efficient compliance processes. The requirements of Aifmd include:

– Daily control processes producing auditable risk measures; and

– Periodic reporting to local regulators, including a summary of the daily controls.

The Seven Pillars of Aifmd

To achieve Aifmd compliance, management companies need to implement or reinforce the following requirements that can be considered as the seven pillars of an Aifmd ready management company:

1. Appointing a single custodian

2. Corresponding controls and due diligence on all delegated activities

3. Daily cash monitoring

4. Independent valuation for all assets including OTCs

5. Performing complete risk management controls daily

6. Implementing period Aifmd regulatory reporting

7. Enforcing the new pay policy for investment managers

Aifmd reporting is perhaps the most visible and daunting aspect of the new regulation. Management companies need to address the challenge of a data-intensive reporting regime that requires advanced grouping mechanisms, complex calculations, an advanced data model that gathers specific data and metrics from various sources throughout the reporting period, and a full audit trail as an additional challenge. Among the data requirements, the following are critical: portfolio investments, including assets, issuers and market information; fund strategy-specific information; shareholder structure; and risk analytics, such as leverage, VaR and DV01. Ultimately, the best reporting engine is only as good as the data that feeds it: sourcing high-quality data on a daily basis is more than a nice-to-have.

While at present most management companies have understood the complete risk control and reporting requirements to implement, most still face the following challenge: how to implement a viable solution to the requirements?

And with what cost profile? For companies coming from the regulated Ucits world, organizational changes will be minimal. For AIF’s, the new regulation brings with it additional cost burdens which will require them to consider how best to approach the regulations, how to approach the creation of a solution and any subsequent impact on their market positioning and fund pricing.

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