A handful of hedge fund managers have dropped their MiFID (Markets in Financial Instruments Directive) licenses, and instead secured AIFMD (Alternative Investment Fund Manager Directive) licenses, in what has raised some industry eyebrows.
The move is quite ironic given that many hedge funds back in 2009 and 2010 invested enormous amounts of energy and accrued significant legal bills trying to figure out elaborate mechanisms by which to avoid AIFMD. However, this latest decision is more borne out of hedge fund hostility to the incoming second MiFID than in any newfound appreciation for AIFMD.
It was reported that Brevan Howard, Tudor Investments and Finisterre Capital were among the hedge funds to have abandoned their MiFID licenses.
“Under AIFMD managers can add MiFID ‘top-up’ permission to run individual portfolios in addition to their AIFs, but they will then be subject to most of the MiFID II customer protection rules in relation to those portfolio clients,” said Richard Frase, partner at Dechert in London.
“If managers do not have the ‘top-up’, they will not be able to look after money for individual portfolio clients.”
MiFID II will become law in January 2018 and will require fund managers to make serious and costly changes to their businesses. Moving forward, managers will no longer be able to subsidise brokerage research through equity commissions but will have to pay for it themselves or through special research payment accounts (RPAs).
Equally fund managers will be forced through MiFID II to supply highly detailed transaction reporting in near-real time, and there has clearly been pushback. However, AIFMs are subject to quite intensive reporting demands under AIFMD through Annex IV, as well as remuneration restrictions, depositary obligations, leverage limits and third-party valuer requirements.
Some hedge funds facing cost pressures would prefer to comply solely with AIFMD to distribute their products cross-border to institutional investors. But the decision not to continue having a MiFID license is somewhat strange, and may prove to be only a temporary “get out of jail card” in terms of avoiding the worst excesses of MiFID II. AIFMD is being reviewed by the European Commission, and the European Securities and Markets Authority (ESMA) is likely to conduct analysis on the status quo of the passport in 2018.
“The AIFMD is being reviewed and we do not know what AIFMD II – when it comes – will look like. It is very possible regulators will want to hammer out any inconsistencies or arbitrages between MiFID II and AIFMD, so doing away with the MiFID license may only be a short-lived reprieve,” added Frase.