- Posted by admin
- On March 4, 2015
- AIF, AIFM, AIFMD, Annex IV, CBI, FCA, Form PF, Gabriel, Regulatory Reporting, VOP, XML
Annex IV – How was it for you?
Fund managers affected by the EU’s Alternative Investment Fund Managers Directive (AIFMD) have been preparing for their Annex IV regulatory filing for some time now. For firms that obtained their Variation of Permission (VOP) which enabled them to operate as authorised AIFMs on AIFMD’s implementation deadline of July 22, 2014, the filing deadline was January 31, 2015.
Annex IV is by no means a breeze. It affects every AIFM which is taking advantage of the pan-EU marketing passport, as well as any manager of a non-EU fund marketing through the national private placement regimes to institutional allocators in the EU. Filing frequency is based on Assets under Management (AuM), with those running in excess of €1 billion required to submit Annex IV on a quarterly basis. Mid-sized (€500 million – €1 billion) and smaller (€100 million – €500 million) fund shops need to supply it to their national competent authority on a semi-annual or annual basis respectively.
The purpose of Annex IV is to provide regulators in the EU with an understanding of the potential risks or systemic risks posed by AIFMs. Will they be able to make any sense of aggregate data from literally thousands of funds? Colour us sceptical but only time will tell. As such, the 300 data sets contained in Annex IV are primarily risk driven. Firms must supply in aggregate and on an AIF-by-AIF basis details of the markets they invest in and exposures, details of counterparties, details of investors and redemptions and subscriptions. Those organisations which built a solid internal infrastructure and ensured individuals worked closely with the various service providers who possessed this vast array of data broadly succeeded in getting a timely and accurate Annex IV submitted.
That said, some managers did face stumbling blocks. A few were overly reliant on their fund administrators providing the Annex IV data, and the data did not always materialise in good time. This was usually because of the sheer volume of work certain administrators had undertaken in the lead-time towards the filing deadline. However, the bulk of managers got through with little fanfare though it is not yet clear if the regulators were happy with the quality of data that was submitted. Other firms simply preferred to outsource the data aggregation to specialist technology firms or administrators. RiskSystem was built with Annex IV in mind and, given we estimate two thirds of the data required is risk related, we are therefore perfectly placed to provide a full XML report ready to be filed at the touch of a button.
What is XML again?
There do need to be improvements so as to ensure the next filing of Annex IV proves to be more seamless – both for managers, their outsourced service providers and regulators, who are tasked with digesting all of this risk data. GABRIEL, the Financial Conduct Authority’s (FCA) online regulatory platform, succumbed to technical problems as the filing deadline approach. Too many managers simply tried to log on and file simultaneously prompting the system to reach capacity, and ultimately crash. This needs to be fixed as it proved frustrating for a number of managers.
Attaining regulatory consistency across national competent authorities is also key. The FCA currently uses XML Schema 1.1 as opposed the XML Schema 1.2 that is advised by the European Securities and Markets Authority (ESMA). A consistent reporting functionality needs to be introduced across jurisdictions to minimise workloads for AIFMs. Some jurisdictions even had nuances in their validation checks but these were unsubstantial. One serious challenge would be if regulators started tinkering with Annex IV and supplementing the existing form with additional questions. This could prove to be an operational headache for managers of non-EU firms marketing into multiple jurisdictions within the EU.
Obtaining streamlined and accurate data across all global regulatory agencies is now paramount. The methodology and calculation requirements as applied to the EU and US (through Form PF and Form CPO-PQR) are different. This needs to change, and regulators should work towards this. Some of the information contained in Annex IV does present challenges. Regulatory AuM (RAuM) applies gross exposures to everything including leverage, and does not take account of hedging arrangements. Instead, every exposure is bucketed into the RAuM number. This makes strategies disproportionately geared heavily towards interest rate swaps, for example, look exceptionally large. Such an AIFM may be managing $10 million, but under Annex IV calculations, that same firm could have an RAuM of $120 million. Needless to say, this could cause some raised eyebrows.
Even more alarmingly, this could precipitate action by regulators against some managers they unwittingly identify as being systemically important financial institutions (SIFIs). Those managers deemed to be SIFIs could theoretically be subject to bank-style capital and liquidity requirements. Such a scenario would add enormous cost overheads to fund managers at an already challenging time.