Ready for round two: Anticipating the next phase of the AIFMD
Ian Lynch and Arnaud Claudon of BNP Paribas Securities Services talk to HFMWeek about what’s next for the AIFMD and how the hedge fund industry can prepare.
Ian Lynch (IL): The first wave of activity is complete and the industry is taking a breath before the next round of obligations begins. Now is the time for managers to look ahead and strategise to make the coming years as simple as possible, ensuring compliance, enabling the best access to European investors and allowing themselves the capacity to focus on investment strategy. We have seen the first round of managers enact the compliance processes for the AIFMD and these are now finalised. Managers running onshore EU AIFs have appointed a full-scope depositary as required under Article 22 of the directive. EU managers of non-EU funds marketing to EU investors through National Private Placement Regimes (NPPR) have appointed depositary-lites where needed, which, like depositaries, provide safekeeping of assets, monitoring of cash flows and oversight of the fund. However, depositary-lites – through Article 36 of the directive – are not subject to strict liability for any loss of financial instruments held in sub-custody.
Arnaud Claudon (AC): I would agree that firms have attained compliance and they are now having a pause to digest the AIFMD. The next big product issue for firms will be understanding the impact of any removal of the NPPR on their businesses. I believe the NPPR vs passporting debate will continue for a while. Being caught in this is something managers will want to try to avoid by having EU-based products on their shelves.
IL: We are seeing more US managers marketing into the EU. It is important to remember that Europe has a huge number of investors, particularly cash-rich pension funds and insurance companies; there are a lot of opportunities within Europe. However, many of these institutional investors prefer to invest in EU-regulated vehicles such as UCITS or AIFMD funds. These large institutions write big tickets and this ought to incentivise non-EU managers to establish onshore vehicles.
AC: EU institutional investors prefer regulated structures as such products tend to promise greater protection. The AIFMD is all about investor protection, as is evidenced with the obligation to appoint a depositary, the need for a functionally and hierarchically separate risk oversight role, as well as the enhanced investor transparency and reporting requirements. I am confident we will see the emergence of an AIFMD brand whose key selling point is investor protection going forward.
AC: We are just at the beginning of the process. It is important to emphasise that while ESMA has said several non-EU markets meet regulatory equivalence to attain the pan-EU AIFMD marketing passport, approval has not been formally granted just yet. At present, we also know ESMA is analysing the rules and regulations in a broader pool of countries worldwide and whether they meet EU equivalence criteria. ESMA assessments are being done on a country-by-country basis. This will take some time, and I believe that the passport will begin to be rolled out after the second half of 2016 at the earliest, subject to a positive ESMA opinion to the commission of course.
IL: It is also important to realise that as the passport is extended to a given fund jurisdiction, NPPR will reach the end of its shelf-life there. While a lot of managers have depositary-lite providers in place, this will not be viable once NPPR expires. Managers will need to go further and appoint a full-scope depositary if they are to avail themselves of pan-EU distribution and compliance with the AIFMD under the passport.