Many managers have to report to multiple templates in multiple jurisdictions, prompting a search for synergies as well as consistency in the data delivered to different regulators through Forms PF and CPO-PQR and Annex IV of the Alternative Investment Fund Managers Directive (AIFMD). COO asked Shankar Iyer, chief executive officer at Viteos, how his fund management clients are looking for synergies in data gathering and delivery as they report to more than one regulator.

COO: What are the biggest regulatory reporting challenges facing fund managers in the United States and what do firms need to do?

Iyer: The fund management industry, as a result of the Dodd-Frank Act, has a statutory mandate to measure systemic risk for the first time. Fulfilling the demands of the reporting and filing mandates will continue to stress internal operations. Seamless filings over time will mean instituting processes and deploying solutions that meet operational, technical, and audit trail challenges. Firms can approach regulatory reporting in one of three ways. They can deploy their own in-house resources; use their fund administrator; or outsource the entire process. A major challenge is the fact that many of the questions contained in the Form PF supplied to the Securities and Exchange Commission (SEC) and the Form CPO-PQR supplied to the Commodity Futures Trading Commission (CFTC) are open to interpretation. Furthermore, they apply to the firm’s portfolio rather than to the trades, so they require managers to collect data in a way that they are not used to doing, and align the data according to the filing requirements.

COO: What are the biggest regulatory reporting challenges in Europe and what do firms need to do?

Iyer: Annex IV of the Alternative Investment Fund Managers Directive (AIFMD) consists of requirements for Alternative Investment Fund Managers (AIFMs) and Alternative Investment Fund (AIFs) to file separately. The sheer scope and number of the questions, and the amount of data that requires collection and interpretation from multiple parties, is daunting, especially if the task is undertaken internally. For example, there are approximately 300 questions that need to be answered for each fund and 40 for each manager. That means that a manager with two funds needs to answer 640 questions. Many of them could be interpreted differently by different managers. Some of the questions are static, and others dynamic, so responses will vary with each filing over time. The data needs to be collected, consolidated, analysed and interpreted on an ongoing basis, and then converted into responses to the reporting requirements, and filed accurately and on time.

COO: How have managers coped with Form PF and CPO-PQR in the United States?

Iyer: Despite the size of regulatory assets under management (RauM), and the number of funds reporting, the SEC experience with Form PF data is still relatively new. As various agencies within the Commission gain expertise and understanding, the uses of the data will expand, providing more safety and protection for the economy, individual investors and the entire industry. While the SEC adopted Form PF in 2011, the implementation of the reporting requirement was staggered so that it is only recently that the SEC has had a full set of data covering all required advisers and funds. The SEC has spent the time between the first Form PF submissions and the completion of the first full set of data determining how to use the data in the best way to improve performance against its own charter and to augment and support existing and proposed programmes. Working with the industry on the reporting process and the survey form itself, the SEC has been able to establish clearer definitions and guidelines to streamline and simplify the reporting process. The Custody Ruling is a recent example of the changes brought about by the industry and the SEC working together. Many advisers had difficulty ensuring timely and proper reporting for paper certificates under the original guidelines, particularly for private stock or funds. The new guidelines spell out how to report custody of paper certificates and private equity holdings, reducing uncertainty and guesswork when filing, and improving the quality and consistency of the data used in the Commission’s analyses. The Commission also issued guidelines to private investors on methodologies for aggregating their private fund holdings to maintain investor and fund privacy while still adhering to the letter and spirit of the regulations. The Division of Economic and Risk Analysis (DERA) at the SEC has begun using Form PF data in the analytical tool that calculates aberrational performance, and in systemic trend and peer analysis in due diligence and enforcement. As managers complete more regulatory filings and regulators build processes and structures to facilitate sharing of data among agencies, they can expect uses of the data to multiply. Insights into the risk-taking activities of alternative investing should offer more transparency into investment and speculation activities, thereby improving one segment in financial services that contributes to the risk inherent in global financial markets.

COO: How prepared are managers to deal with Annex IV and what needs to be done?

Iyer: There are three issues here. They are liaising with counterparties; data availability in the appropriate format; and scheduling and progress measurement. A vast majority of firms simply do not have the time or the experience to do this. We recommend a 90/60/30/15 day process. In other words, firms should start assessing the scope and roles that need to be assigned 90 days from the deadline. At 60 days, the technical challenges should be met. Firms should ensure data is consolidated from all parties, and connected to their internal systems. It is also essential to establish audit trails at this time too. Validation should be conducted 30 days prior to deadline. Finally, firms should carry out a mock filing prior to submitting their actual filing. Additionally, our experience is that firms subject to multiple filings need to monitor their filings on a monthly basis, which a third party is best placed to do. Senior personnel at the firm must also be involved in the entire process. More importantly, AIFMD requires the report within 30 days of quarter end, which leaves only 10 to15 business days from receipt of final month-end net asset value (NAV).

COO: Have managers leveraged their experience with Form PF and CPO-PQR in the United States in their compilation of Annex IV?

Iyer: The primary objective of all of these regulatory reports is the measurement of systemic risk, so they have the same ultimate goal. However, the questions are unique. There is some overlap but there is no “cut and paste” from one to the other. In other words, answers and calculation from Form PF cannot be re-used in Annex IV. The AIFMD form is more rigorous and prescriptive. It does not offer similar flexibilities to Form PF. AIFMD is far-reaching as well, in the sense that the reporting is only a part of the submission. The Directive covers a whole host of areas, such as the appointment of a depositary, compliance and internal audit, independent reconciliations, liquidity management and measurement, risk management, capital requirements, professional indemnity insurance, and so forth. In terms of reporting alone, AIFMD is more stringent and covers additional areas, including leverage computations. Even the questions which are similar to Form PF are more detailed and require more in-depth analysis. However, data consolidation across the administrator, prime broker and risk management functions can be synergised, and the underlying data can be used for Form PF, Form CPO-PQR, and Annex IV, but the calculation and questions are all different. We believe that regulation across jurisdictions is going to stay, if not grow. Any data collected should be a one-time exercise which can be synergised across different regulators, thereby making it seamless for the manager.

COO: Do you help managers with their Open Protocol submissions, and what are the challenges facing filers with that report?

Iyer: The Open Protocol template enables fund managers to develop reports against a standard, creating efficiencies. It is designed to make life easier for hedge funds to deal with risk data. Viteos is fully capable of working with OPERA, regardless of regulatory mandate or jurisdiction.

COO: How much overlap is there with Open Protocol and regulatory reports such as Annex IV, Form PF and Form CPO-PQR?

Iyer: Overlap is not the issue as Open Protocol is a standard, and the information can be found at the Open Protocol website. The template for Open Protocol is consistent with the data, format and filing requirements for Form PF and Annex IV.

COO: How much divergence is there between Form PF, Form CPO-PQR, Annex IV and Open Protocol?

Iyer: There is 60 per cent duplication in underlying data, but the interpretation varies by firm, and the types of questions – whether static or dynamic - vary across each separate filing. There is convergence between Form PF and CPO-PQR, as they tack off each other. Open Protocol is a template, and requires input to generate its reports, but this is consistent with all the regulatory forms. That said, it is not simply a data collection and reporting exercise. In addition to the complexity of gathering data from various sources, much of this data has never been requested before. It is also a challenge of making accurate, multiple, time-sensitive filings of data, that have to be de-coded and interpreted.

COO: How is Viteos helping managers deal with their regulatory reporting requirements?

Iyer: Our regulatory reporting platform meets all of the needs of managers, regardless of form, mandate, or jurisdiction, and is designed to solve the operational, technical and audit challenges for seamless filings. We keep abreast of developments, un-burdening firms from the regulatory requirements so they can focus on their core business. Additionally, firms value the consultative experience that we have, so we are working with both their operations groups and with external data sources, so that firms can be confident their filings are accurate and reliable.

COO:What were the biggest challenges for Viteos and how have you overcome them?

Iyer: We were fortunate to have designed our technology so that the sourcing and manipulation of data was already in place – from a middle and back office viewpoint. We leveraged that advantage and pivoted, developing experience as the regulations were issued. Our broad experience in global reporting, regardless of the complexity of asset classes, certainly helped in the interpretative phase. Viteos has never been cookie-cutter, and so we had an internal culture that saw this as an opportunity to continue to serve our clients in a new and essential way, given our robust accounting, technology, and operational skills.

COO: What plans do you have in terms of developing your systems and infrastructure to deal with the ever-evolving rules and regulations?

Iyer: This actually strikes at the heart of a key issue facing managers for the long term. Experience indicates that regulations not only evolve over time, but that they tend to expand rather than contract. That is to say, those new rules are built on top of older ones, but the older ones remain in place. Managers are often faced with the choice of either developing an internal capability - in effect, a regulatory department - or, as in other areas, outsourcing that function to a firm whose job it is to keep up with the regulatory changes, while remaining cognizant of the manager’s internal business operations. That is precisely what Viteos has done in building our entire business. Our technology accommodates changes not only in the evolving regulatory requirements, but keeps abreast of all industry developments, technology developments and developments in asset classes and regional markets, in order to serve the interests of our clients.