As part of AIFMD the European Securities and Markets Authority (ESMA) has introduced compulsory reporting requirements commonly referred to as Annex IV. This will affect every single manager of an Alternative Investment Fund either based in the EU (or EEA) and/or marketing into member states.
For the unaware Annex IV reporting is about to begin very shortly (Q4 for some early authorised AIFMS but generally Q1 2015 for the majority). We are seeing a sea change in awareness of the requirements of Annex IV but also a realisation that risk calculations are central to accurate reporting. For example we estimate that for the full scope Annex IV reporting requirement approximately 67% of the data is risk based including exposure levels, leverage calculations, stress testing, scenario analysis, counterparty and liquidity risk analysis etc. The data may have to be collected from multiple sources (large managers may have several administrators, sub-custodians or prime brokers), aggregated, validated, relevant metrics calculated, checked and mapped to the appropriate fields. Finally the data needs to be converted to the correct file format1 and filed with the appropriate National Competent Authority (NCA). Thus specialist risk intelligence firms such as RiskSystem with the ability to calculate the relevant risk metrics and seamlessly integrate multiple data sources are well placed to provide comprehensive, accurate, regulatory reporting solutions.
Alternative Investment Fund Managers (AIFMs) must file specifically formatted reports which need to be filed 30 days after quarter end (45 days for fund of hedge funds). The AIFMs’ must report to their relevant NCA and already there seem to be apparent differences in what each NCA is expecting – some NCAs are insisting on certain fields being filled whilst others are making them optional. The reporting is required for both the AIF and the AIFM. This may provide particular issues for platforms as the AIFM is required to aggregate risk values across all of its AIF’s. AIFM’s must report quarterly, semi-annually or annually depending on their AuM. Leverage has also to be taken into account and could result in more regular reporting requirements. Sub-threshold firms (AuM below €100m) need only report annually and have slightly less onerous reporting requirements.
What the NCA’s hope to achieve by aggregating all this data is a discussion for another time – no doubt there is some systemic monitoring and regulatory objectives behind Annex IV’s burdensome obligations. However like AIFMD itself Annex IV provides challenges to Investment managers in terms of risk calculations, risk aggregation and reporting in a timely manner. Investment managers that fail to meet the strict regulatory deadlines or file incorrect information will leave themselves open to fines and penalties. These consequences of non-compliance are entirely avoidable if the correct risk reporting service is selected from the beginning.
1xml though some NCA’s currently accept an excel spreadsheet