Webinar: How ready are AIFMs for Annex IV reporting under AIFMD?
AUDIO: An audio replay of the Webinar. Click on the 'Play' button to listen.
By Charles Gubert
•Dominic Hobson, Founder of COOConnect (Moderator)
•Daniel Jude, Director of Client Development and Sales at CME Group
•John Vaughan, Head of Global Product Management for Fund Administration at BNP Paribas
•Mark Fitzpatrick, Chief Operations Officer at RiskSystem
•Adam Hodgkins, Director of Operations at Cordium
•Ranjan Mishra, Regional Head of Business Operations for Viteos Fund Services
The Alternative Investment Fund Managers Directive (AIFMD) requires AIFMs and non-EU AIFs marketing through national private placement regimes to submit a highly detailed Annex IV reports to regulators as their on-going efforts to monitor systemic risk. Annex IV reporting is one of the biggest challenges for impacted fund managers.
Here are some of the key findings from a webinar held by COOConnect’s on these issues:
•Annex IV reporting is all encompassing and pretty much affects nearly every fund manager that is not UCITS but has either a presence inside the EU or European Economic Area (EEA) or is marketing into member states. One panellist said more than 40 different types of fund manager types would be ensnared by the rules.
•Annex IV, which comprises 41 highly forensic questions, requires managers provide information on instruments traded, exposures, Assets under Management (AuM), liquidity profiles, a breakdown of investments by type, geography and currency, concentrations, risk profile covering counterparty, market and liquidity risk, borrowing and exposure risk, stress test results and leverage.
• Reporting frequency for Annex IV is determined by AuM. Firms running between €500 million and €1 billion are expected to file Annex IV on a semi-annual basis while managers in excess of €1 billion must submit the report quarterly. Those managing between €100 million and €500 million must file annually. However, this is subject to leverage calculations. A firm therefore managing €400 million might be sufficiently leveraged and instead of filing annually, would be expected to submit Annex IV semi-annually or even quarterly. Unleveraged private equity funds must provide Annex IV annually irrespective of AuM. However, leverage calculations are continuing to confuse managers, many of whom fear that the leverage calculations outlined by the regulator could make them appear more systemically important than they actually are. The depth of reporting also varies by AuM.
•Reporting is already happening for early registrants although most expect Annex IV reporting to kick off truly towards the end of January 2015.
•Firms must supply Annex IV to national competent authorities 30 days after the end of each quarter although funds of hedge funds have been given 45 days. This could lead to significant challenges in obtaining an accurate Net Asset Value (NAV) to supply to regulators. This time-frame pales in comparison to the 60 days afforded to managers filing Form PFs with the US Securities and Exchange Commission (SEC).
•Non-EU AIFMs marketing towards institutional investors in EU member states via the national private placement regimes must supply Annex IV to each of the jurisdictions in which they are marketing into. AIFMs taking advantage of the passport regime are required only to supply one Annex IV report to their national regulator.
•There is a strong risk regulatory arbitrage could develop as various national regulators insist on different or additional data sets being inserted into Annex IV. Some questions are optional although a handful of regulators, most notably Austria, are making them mandatory. Regulatory arbitrage is already evident in how Annex IV is supplied and formatted to different regulatory agencies
•The Annex IV is prescriptive unlike the Form PF, which permits fund managers to have more of an interpretative approach to data calculations. Fund managers were advised to refer to Annex II to obtain greater clarity on how to fill in Annex IV correctly. Panellists also pointed out to the differences between Form PF and Annex IV. In other words, replicating Form PF onto Annex IV is not an option.
• The cost of compiling Annex IV is not uniform. The costs will be determined by how challenging it is for the fund administrator or vendor to collect the data. A large multi-strategy manager will typically employ several fund administrators across its funds and collecting the data from all of these providers will be challenging. At the bare minimum, the cost of appointing a provider to undertake Annex IV work will cost a manager between $20,000 and $25,000.
• Three options to managing the Annex IV process were presented to managers. The first, applicable to the large institutional managers, is to internalise the process and build the infrastructure and systems to compile Annex IV. Mid-sized firms were advised to outsource to a third party vendor, while small managers should elect to hire a contractor on a temporary basis.
•Regulatory reporting through Annex IV must be consistent with other reports such as the KIIDs and PRIPs. A failure to achieve this could facilitate an awkward conversation with regulators.
• There was debate as to whether firms are outsourcing their risk management and data requirements to management companies. One panellist pointed out this was the preserve of smaller AIFMs lacking the balance sheet to invest in the necessary infrastructure to meet the various regulatory requirements. Others said the opposite, pointing out management companies were rapidly gaining traction among AIFMs of all sizes.