With the Alternative Investment Fund Managers Directive (AIFMD) currently passing through Luxembourg’s parliament, the jurisdiction’s investment funds industry association this week gauged the domicile’s readiness for the new directive.
During a panel discussion on AIFMD at ALFI’s London conference on Tuesday, John Siena, head of EMEA External & Regulatory Affairs, BNY Mellon, said he expected a seamless transition for the jurisdiction when the directive is implemented in three month’s time given its expertise with the existing investment fund regime. “This puts Luxembourg in a strong position since the SIF regime looks familiar (to AIFMD) in terms of where assets are held in a supervisory context.”
The service provider proposition is evolving with AIFMD, noted Martin Dobbins, managing director, country head, Luxembourg State Street Bank. “We see this particularly with management companies where there has been a building up of our substance and skill sets. It’s about building out the service model, not just around the core accounting and custody, but around the risk management and compliance services. This is where we see service providers really building out their skills and core competencies now in conjuction with the management companies.
“We’ve seen a lot of interest especially out of Asia where there are a number of managers that come to us asking not necessarily to outsource but how much can we take over for them because they have to focus on distribution and creating their own substance. That’s the space we’re in – becoming the back office to a lot of these management companies.”
The costs around AIFMD are still evolving, panelists agreed, and, while there is not a lot of differentiation among service providers in what they will provide under the new regulatory regime, costs will be higher than what they are for UCITS.
In an audience poll, 57% of delegates, constituting a significant portion of the total 700 in attendance at the ALFI event, believed the increase in costs for depositories will be significant and asset managers will avoid being in scope of the AIFMD; 40% believed the increase of costs will be marginal and will be outweighted by the advantages conferred by the AIFMD; 1% believed there will be no impact on costs for depositories and 2% believed the costs will decrease.
Dobbins noted that since there was largely a requirement for a depository or a custodian for SIF structures pre-AIFMD, which helped to build the existing expertise, the focus will be on where services providers are seeing some of the changes happening that could be driving costs. “This includes what is the oversight of custodians networks, not just our own but others we have to engage with,” said Dobbins. “Some of the terms (of AIFMD) are very vague in terms of cash monitoring. The level we have to go down to in one legal structure and multiple legal structures will also drive costs.”
Dobbins also noted a lack of clarity on what is acceptable for service providers to rely on with respect to the segregation of assets. “Additionally, for due diligence purposes, if we’re going to a counterparty - whether it’s a securities lending agent, collateral management agent or prime broker – as a depository my clients are asking due diligence questions even at a country level because our agents want us to prove at a local level that we’ve done the due diligence,” he said. “We need to know what would be deemed acceptable down the road so that we can say we’ve down our due diligence. If we cannot come up with industry practices that are accepted by audit firms, service providers and asset managers and tackle them one by one that will be the difference between the costs being this much and being out of the sky.”
Siena added that the idea of the cash monitoring is not well placed in terms of how this duty is being interpreted. “It makes specific reference to Madoff and the idea that a depository conducting daily reconciliation of all cash movements between a manager and its counterparty would somehow have prevented a Madoff,” he said. “I think it has nothing to do with Madoff so there has been some kind of disconnect there, which is unfortunate. We are looking at a lot of pragmatic solutions. We’ll get there but it’s going to require a lot of integrated dialogue between industry and the regulators.”
The following polls were also conducted during the panel discussion:
What will be the impact of the AIFMD on international onshore centers versus offshore centers?
- The position of international onshore centers will be strengthened (50%)
- The position of international onshore centers will be weakened (14%)
- The position of international onshore centers will not be impacted (4%)
- Too early to say (32%)
Where do you expect AIFMs to be domiciled in the future?
- In the financial centers for asset management (42%)
- In the fund jurisdictions (17%)
- In both, depending on the relevant asset class (PE/RE versus Hedge) (36%)
- Outside of Europe (6%)
For Alternatives Managers: How do you rate the impact of AIFMD on
your business? - This is just a compliance exercise resulting in additional
cost with no real impact on our business model (13%)
- It does not impact our business model but it does significantly impact our
operational, legal and/or governance model set-up (55%)
- It impacts our business model, in terms of fund raising and/or investment
focus (31%)