Hail it for its virtue or wail about its nuances, regulatory reporting is a bitter pill that the financial industry is trying to cope with.
With the aim of protecting the industry from yet another crisis, authorities are tightening the grips over the financial firms with stricter norms and reporting requirements. Alternate Investment Fund Market Directive (AIFMD) aims to close the loopholes of Alternate Investment Fund (AIF) industry and regulate the non-UCITS funds sector, which include particular hedge funds, private equity, real estate infrastructure and investment trusts.
In October 2013, The European Securities and Markets Authority (ESMA) published the final guidelines on the reporting obligations for alternate fund managers under Articles 3 and 24 of AIFMD. These reports filed by both AIFMs and national supervisors will help authorities to monitor systemic risk of AIFs. ESMA guidelines aim to standardize the reporting across the European Union (EU). It will also facilitate the exchange of information between national regulators, ESMA and the European Systemic Risk Board. Though the directive came into force in July 2013, the member states have a grace period of 12 months to convert the directive into national law. AIFMs are making use of this transitional period to seek authorization and make the required amendments, which will help them comply to the new regulation.
The ESMA reporting guidelines on AIFMD focuses on key areas like portfolio concentration, exposures and investment strategies, which enhances transparency and enable consistent and more comprehensive oversight of the fund manager’s activities.
As the first step, all AIFMs managing AIFs will need to obtain authorization from the competent authorities before July 2014. All EU domiciled AIFMs with assets under management above the threshold of 100 million EUR or, in case of AIF with no leverage and lock-in period of 5 years or more, above the threshold of 500 million EUR will need to be authorized by the home Member state competent authority (CA) and are subject to ongoing requirements.
Authorized AIFMs are required to report to competent authorities the main instruments in which it is trading, the markets in which it actively trades and the diversification of the AIF’s portfolio including its exposures and most important concentrations. All AIFMs operating in the EU will be required to provide detailed information on the breakdown of investment strategies, the total value of assets under each AIF managed and the turnover of the AIFs. When a non-EU AIFM reports information to the national competent authorities of a Member State, only the AIFs marketed in that Member State have to be taken into account for the purpose of the reporting.
On the risk side, AIFMs should report to national supervisors the current risk profile of the AIF including the market risk profile of the investments of the AIF, by explaining its expected return and volatility of the AIFs in normal market conditions. Regulators also want to keep a tab on the liquidity profile of the investments in the AIF by measuring and understanding the liquidity profile of the AIFs assets, the redemption terms and the terms of financing provided by counterparties to the AIFs. The directive also wants the fund managers to provide competent authorities about the information on the main categories of assets in which the AIF invested including the corresponding short market value and long market value, along with its performance and turnover during the reporting period.
The economic crisis has increased the importance of stress testing in financial markets. AIFMs are also required to undertake stress testing regularly depending on their investing strategy, liquidity profile, investor type and redemption policy under normal and exceptional circumstances and report the results to the competent authority.
One of the main concerns that any reporting requirements bring forth is the period of reporting. The rule makers have split reporting periods into quarterly, half-yearly and annually based on the size and complexity of the fund and nature of the requirements.
Beyond the straight line
The rule makers have taken into account the fluctuating nature of the financial market and have laid rules to monitor the impact it creates on the AIFs. For example, fund managers are required to notify the competent authority of any breach of thresholds of assets under management. If the fund manager considers the breach to be temporary, it should explain to the competent authority the situation and why it is considered a temporary situation. If the breach is not temporary, it must notify the authority of this without delay and seek authorization as an AIFM within 30 days.
Apart from breach of thresholds, AIFMs are required to inform competent authority if it is managing one or more AIFs, which are employing leverage on a substantial basis. Additional disclosure obligations will apply to AIFM managing leveraged AIF and controlling stakes in companies.
ESMA has also published some technical materials like consolidated reporting template, that will facilitate the reporting by AIFs to regulators.
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