The first wave of reporting requirements set out in the European Alternative Investment Fund Manager Directive (AIFMD) for first-time fillers come into force on October 31. This will mean a wide range of alternative investment funds and private equity managers will fall into the regulatory scope, some for the very first time. They will have to fill in more than 300 data points and submit data on investment strategies, assets under management, stress test results, and instruments traded. But for AxiomSL’s Ralf Menegatti, product owner asset management for EMEA region, he sees a number of technological challenges that some firms have not prepared to face. Looking at the consequences of Annex IV reporting and AIFMD on the relationship between funds and custodians, he argues the directive would have a significant impact.
GC: What are the main challenges and issues you are seeing arising from AIFMD?
RM: First of all the directive covers a very large scope. It is one of the biggest regulatory changes that I have seen, just because it has turned everything around concerning depository bank operations, sub-custodian set up, segregation of accounts etc. So it really goes in-depth into every detail. However, the Annex IV reporting requirements are the part of the directive where people really have to lay their cards on the table and be transparent. In my opinion most people have underestimated the effort required to deliver files and quality reporting to the regulators, with some leaving it to the last minute, as the first wave of reporting commences on Friday October 31. It will be interesting to see in a couple of weeks what the regulators have found with the data.
GC: Will alternative fund managers be able to collect all the data properly?
RM: The biggest challenge created by AIFMD reporting is all of the transformations involved. Fund administrators and service providers have to collect 400-800 data items from different legal entities and then put them through a series of transformations to fill the 340 fields in the reports that are sent to regulators. That transformation layer creates a lot of work. It requires good data governance and people with expert knowledge of the data.
GC: Will regulators take a tough line on fund managers that fail to report in a timely manner?
RM: I have spoken to the U.K. regulator, the FCA (Financial Conduct Authority), and they said they intend to fine all market participants that deliver their reports late. For the first time, the alternative fund industry has to report in-depth structure figures on their operations, investment strategies, NAVs (net asset value), and so on.
GC: How will firms deal with the requirements for products that have not previously been reported?
RM: It will be a huge challenge to report on products that have not previously been subject to regulatory reporting, and it will not be easy communicating this challenge to the regulators. They might have to send over new data that previously they might never have had to store. About 30% of the data required for reporting has not been integrated into the core application systems used by fund administrators, so they will be relying on error-prone manual workloads.
GC: Will the regulator actually be able to understand and interpret all the data being reported?
RM: Regulators will have a lot of data from a wide range of sources. After speaking with a lot of participants, mostly fund managers, they think it will just be another ‘grave’ for operational data which nobody will take care of. But I think there will be different attitudes. The Luxembourg and U.K. regulators both confirmed they will collect market data and provide statistical analysis. My expectation is that stress test data and liquidity risk management data will get a different meaning and significance in the administrative sector.
GC: How will AIFMD change the relationship between the fund manager and the custodian?
RM: AIFMD has completely turned the funds industry on its head. The directive is forcing fund managers and directors to abandon the multi-jurisdictional organizational structures they often use. Requirements for greater transparency mean it is no longer profitable for a fund manager in Jersey to use the services of a sub-custodian bank in London and a depository bank in Paris, for example. Fund managers have also had to follow substance requirements and segregate risk and portfolio management from their fund services company and their custodian. In addition to all of this, they have been obliged to implement new risk management and liquidity risk management measures. The impact of all of these changes cannot be underestimated.
GC Friday Interview: AxiomSL’s Ralf Menegatti on the Post-Annex IV Environment
The first wave of reporting requirements set out in the European Alternative Investment Fund Manager Directive (AIFMD) for first-time fillers come into force on October 31. But for AxiomSL’s Ralf Menegatti, product owner asset management for EMEA region, he sees a number of technological challenges that some firms have not prepared to face. Looking at the consequences of Annex IV reporting and AIFMD on the relationship between funds and custodians, he argues the directive would have a significant impact.
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