GC Perspective: Getting to grips with regulation and fragmentation

Overcoming regulation and fragmentation: investment funds need adaptability and local expertise.

By Editorial
The prospect of complying with AIFMD and UCITS V is unlikely to inspire many investment fund managers. Yet those who respond proactively to these regulations stand to put themselves at a competitive advantage over their reluctant peers. The key is demonstrating a combination of adaptability and local expertise, according to Susanna Scheffold, Global Head of Securities Services at UniCredit

Change is commonplace in the investment markets – and it’s on the march again. In large part, this is due to the need for compliance with the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities V (UCITS V). Meeting these requirements will necessitate a greater focus on securities services – with an emphasis on flexibility, communication and local knowledge.

While complying with the new rules will be an expensive and time-consuming investment – and one with little in the way of direct financial return – it is not without its advantages. There is little doubt, for instance, that AIFMD and UCITS V do much to make markets more secure, more standardised and more efficient. Meanwhile, the challenge of compliance is in itself an opportunity for those that are best prepared to get ahead of the competition.

If they are to succeed in doing so, funds must communicate openly and regularly with their securities services providers, with a view to making more of what’s on offer. For instance, new automated features can take pressure off workers by simplifying administrative procedures.

Perhaps the most important ingredient of all, however, is that funds must expect their providers to demonstrate local knowledge – and show the flexibility to refine this knowledge constantly as markets continue to evolve. This need is at its greatest in the Central and European (CEE) region, which, in spite of harmonising regulation such as AIFMD and UCITS V, remains a highly fragmented environment.

A change of focus

Of course, one of the principal effects of these regulations is that they are driving fund managers to concentrate on risk management. And this, in turn, is causing them to reassess what they require from their securities services.

The securities services market has for a long time been very crowded. In the past, this meant that competition was largely dependent on pricing. Yet now, with a new focus on risk management, funds are turning away from cost-efficiency concerns and putting a greater emphasis on the quality of service. Funds will want need to work closely with their service providers to find the right balance between these two factors.

Indeed, communication between funds and their securities services provider is critical to a successful partnership. It is vital, for instance, for providers to stay up to date with their clients’ goals, needs and business models. This gives them the information they need to offer the right balance of sophistication and cost.

A change of gear

This new approach brings with it a number of benefits. Providers intent on raising the bar are increasingly integrating digital technology into their services – minimising administrative costs and bringing speed and efficiency via straight-through processing. This means, for example, that funds can view their balances almost immediately – vastly improving on the waiting times of manual methods. Likewise, thanks to online platforms, there is next to no delay for fund managers wishing to look at the portfolio of assets they have held in custody.

UniCredit’s BusinessNet Securities, for instance, is just one such digital platform on the market creating significant economies for domestic funds by driving improved cost-income ratios.

But beyond this, funds will see the greatest advantages from a step up in the quality of the core service. In particular, funds must look for a deep understanding of local practices and regulations. This is a crucial aspect because although much incoming regulation aims at harmonising markets, variations still remain.

The fundamental problem is that when a single set of rules is applied to a number of divergent legislative systems, the result tends to be several similar – but subtly different – sets of rules, each with their own idiosyncrasies. Take Central and Eastern Europe, for example. Commonly classed as a single region, in reality it is made up of numerous disparate countries. And these countries differ wildly in terms of market size, market liquidity, maturity, political situation, economic potential and culture.
Critically, these countries are also governed by very different legislative systems, which has an effect even when dealing with standardised pan-regional regulations. Each country consequently tends to integrate new rules into its legislature in its own way, and according to its own individual customs.

This matter is often exacerbated by the fact that regulations are always subject to different interpretations – which are all the more likely among countries with significant cultural differences.

It should come as no surprise, therefore, that countries in the CEE region are fraught with local variations in practice and legislation. This is particularly true in the case of corporate actions – making detailed knowledge of local customs and execution an essential asset for funds. It is this local knowledge that securities services providers must supply if their partners are to succeed.

Adapt and thrive

Yet local expertise alone is not sufficient. The market is unpredictable and ever-changing. Keeping up will therefore require not only a deep understanding of regulation and execution in each locality, but also the ability to adapt this understanding quickly and accurately to account for market changes.

For this reason, funds must expect another quality from their securities services provider: adaptability. It is vital that they have the capacity to adjust to new developments while maintaining a high level of service.

With these two qualities together, funds have a winning combination on their hands. By pairing this flexibility with expertise on the customs, regulations and practices of local markets, securities services providers can equip funds with the resources – and the confidence – to steer a course through these rough seas, and emerge the other side more profitable and more resilient.