Welcome to our latest newsletter. We have changed the format from a PDF to an ezine built into our website for easier viewing.
It has been an extremely busy first half of 2014 here at RiskSystem. So far this year we have
– moved into new larger, more central offices
– built enhanced functionality into the system
– added new pipes into several administrators
– signed new clients in areas such as AIF, AIFM, QIF, PIF, UCITS and REIT structures
– providing risk services to investment managers with over a €1bn AUM
– providing consultancy services to managers who need assistance with documentation
(e.g. RMPPOA etc.) for their AIFM licence applications
– been attending and exhibiting at conferences in Dublin, London and Luxembourg
– contributing to a blog for COOConnect http://cooconnect.com/approved-aifm
Current Observations and Musings
One of the things that has become very apparent to us in recent months is that many funds require our full service, that is risk analysis as opposed to risk number generation. The risk directors are requiring regular contact with our risk analysts, our commentary on the evolution of the risk of their funds and our attendance at board meetings / risk committees as necessary. This illustrates the sea change taking place in how seriously managers and directors are taking risk. And what is really evident is that this is taking place not just for AIFMs, which would be expected with the AFIMD deadline less than twenty days away, but also in the UCITS space. We have been pleasantly surprised by the amount of UCITS managers contacting us looking for risk services – perhaps it is the focus on risk in AIFMD that has led them to re-evaluate their risk requirements. In many cases it has been an eagerness to provide real substance into their local fund domicile which we can provide.
Clearly the regulators too are becoming ever more focused on risk management. It was always there to some extent in the UCITS regulations but, being honest, there was a wide variety of opinions as to its implementation (“nature, scale and complexity” anyone?). Most “risk” reporting into UCITS boards consisted of “there was an inadvertent breach due to the fund holding 21.2% of cash with the administrator”. AIFMD has moved the emphasis back on to actually identifying, measuring, monitoring and managing all risks at all times. We can debate how to define “all risks” or “at all times” but it would seem obvious that at the very least boards should be setting up a risk framework to include the fund’s risk appetite (setting the funds Risk Profile), documenting this in the Risk Management Process, allocating responsibilities and escalation procedures and finally ensuring correct risk reporting is in place (be it to The Board, Chief Risk Officer or the Regulator).
When a fund engages RiskSystem one of the very first things we do is review the Risk Management Processes (RMP) document. What we are finding is quite a few inconsistencies with other documentation. In some cases wording has been clearly copied and pasted (equity related restrictions appearing in bond supplements for example). Risk limits that are clearly inappropriate (mathematically impossible in some cases) for the type of fund. Some funds have been in breach for long periods as the manager clearly didn’t understand either the regulations or had paid no attention to the RMP. Our view is that it is far better that we discover these errors and put it right than for the regulator to visit, begin enforcement proceedings, perhaps slap a big fine on the entity and possibly in extremis remove the promoters license. If you think the cost of compliance is expensive (and frankly it doesn’t have to be) try the cost of non-compliance.