Introduction
The Alternative Investment Fund Managers Directive (AIFMD) is one of a package of measures drawn up by the European Commission to regulate financial services in the wake of the global financial crisis. Its aim is to establish a harmonised regulatory framework for monitoring and supervising the perceived risks posed by alternative investment funds ( i.e. all collective investment undertakings that are not regulated under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive). This includes all previously unregulated funds such as private equity and hedge funds, real estate funds, commodity funds, infrastructure funds and other types of institutional fund. Rather than regulate the funds themselves, however, the Directive targets their fund managers. The Directive was published in the Official Journal on 1st July 2011. Member states have until 22nd July 2013 to implement it into law and AIFM’s existing as of July 2013 will need to be authorised by July 2014. The European Securities and Markets Authority (ESMA) will be the primary regulator overseeing the AIFMD.
It will apply to anybody with a head office or registered office in the European Union who is an alternative investment funds manager (AIFM) of an alternative investment fund whether the fund is located in the EU or elsewhere. It will also apply to non-EU managers managing European funds (whether they are marketed in the EU or not) and to non-EU managers marketing non-EU funds within the EU.
Impact on IT Systems and Data
ESMA published its Final Advice in Nov 2011 to the European Commission on possible implementing measures which will be reviewed and finalised over the next few months. Whilst the specifics of the directive are still being worked out, there are various elements of the AIFMD (listed below) that will heavily affect the non-UCITS sector. Gearing up for AIFMD requires all industry participants, especially managers, to start taking action as soon as possible.
increasing transparency for the purposes of systemic risk monitoring is a key aim of the directive, as well as providing much more data out to the investor community to restore public trust in the system. To this end, these funds must register with their national regulators, then provide enhanced disclosure on their risk management systems and strategies, and their investment strategies. This increased operational transparency will throw a spotlight on their underlying risk and data management systems, thus compelling those with little infrastructure in place to begin to roll out new systems and technology. The new capital requirements for firms acting as third party fund managers (to whom these funds can delegate responsibility) will also likely further compel these firms to seek operational efficiencies to this end.
Regular reporting to the fund’s national regulator will also require them to maintain up to date data on the instruments they are trading, including supporting any standards requirements for the identification of these instruments. They will also need to provide data on the markets in which they are participating (including Market Identification Codes) and data on their principal exposures and position concentrations for each individual fund. This data must also be detailed in annual documentation for each fund. Thus the next couple of years should see these funds beginning to put new data and risk infrastructures in place.
Not only will depositories be required to monitor and obtain data from these funds, they will also need to perform due diligence on the custodian and the prime brokerage communities, thus extending transparency requirements outwards to other players in the market. The ability to present that data quickly, accurately and verified in a number of formats will be critical in helping both the depositories and investors to meet their objectives. All players in these markets will therefore be compelled to invest in data infrastructure (if they haven’t already) to support these new, frequent reporting requirements.
In terms of risk management requirements of the directive, these funds must have in place “independent” capabilities that are separate from operating units, thus dividing the risk function from portfolio management, for example. The focus is on these firms being able to get a handle on all types of risk that impact the investment position of a fund and their overall investment strategy. Therefore, data – whether it is positional, reference or counterparty related – must be quickly accessible for reporting purposes.
How we can help
SCS has extensive expertise in the financial markets and alternative investments arena and we can bring in the required market expertise and compliance technology professionals to assist with the Data / technology strategy to help understand the impact, carry out high level planning as well as provide relevant advice to help firms with their AIFMD implementation needs from a technology perspective. SCS offers the following solutions
a) Consultancy
c) Services
For more information please write to our experts at aifmd.practice@scs-emea.com or use our Enquiry form