December-January 2015

ANNEX IV REPORTING: How to deal with an early deadline

DeadlineAlternative managers face their first reporting deadline in early 2015. Nicholas Pratt looks at the state of preparedness and problem areas. There is something cruel about January deadlines. We are used to working slavishly in December to clear out in-trays before the festive break, but a few people come back in the new year to find a critical regulatory deadline looming in January.  This is what faces fund managers under the Alternative Investment Fund Manager’s Directive (AIFMD) who must file their first Annex IV reports – which requires numerous data about funds, including counterparties – by January 30, 2015. And to make matters worse, the regulatory requirements keep changing, says Etienne Deniau, global head of business development for asset managers and asset owners at Societe Generale Securities Services (SGSS).  “We wanted to file at least one Annex IV report before the deadline so we have been progressively filing, however, many of the requirements have been blurred or unpublished. Some of them may appear just a week before the deadline so we have to adjust very quickly.  “In this regard, we expect some leniency from the regulators initially but I’m sure they will get tougher on the requirements towards the end of 2015.” Annes IV reporting box newBut there is also still a licensing backlog and some managers will be without a licence by the deadline. Consequently their deadline will be deferred until later in the year.  “It has been messier than expected and people will be working most of their weekends right up to the deadline,” says Deniau.   There are more than 300 fields to complete and it is not clear how all of them are meant to be populated, says Deniau. “How do you report reverse purchase agreements? How should turnover be expressed? Do you include the nominal value of listed derivatives? When do you compute exposition? We are asking for clarity but the devil is always in the detail.  “That said, 90 to 95% of the reporting requirements are clear and the rest I expect to be sorted out by the end of the year and before the January deadline, but it will be a struggle.The workload has also increased for managers, even the ones that have outsourced reporting to administrators or other third parties, says Deniau.  “A lot of managers have underestimated the amount of work they need to do even if they have outsourced the reporting. They still have to provide us with certain information, especially anything to do with the fund’s strategy. The fear is that the workload will snowball the closer we get to the January deadline.” OVERSIGHT SERVICES
The Annex IV process and the requirement to source information from clients has also changed the relationship between depositaries and the prime brokers that represent hedge funds, says Shane Ralph, head of depositary oversight services in Europe, Middle East and Africa, at State Street. “The reporting for prime brokers has been an issue, in which some have said there is certain information that they can’t provide. Some US prime brokers are still holding out in terms of certain information that we need. As a depositary bank we understand what the regulators want, it is up to the prime brokers to understand that as well.” Others believe that administrators have created some of their own problems by not making services user-friendly enough. “Managers have signed up to administrators’ reporting services which still require them to submit information but it is not always clear what the administrators are looking for,” says Andrew Shrimpton, global head of regulatory compliance at Kinetic Partners. “The administrators are trying to automate something that is difficult to standardise, especially when it is a brand-new process, and I am not sure if they have the expertise.” A lot of the providers have undergone similar work to Annex IV reporting in the US under rules there. However, it is a source of much frustration within the global hedge fund and administration industry, that the two major projects, Dodd Frank in the US and AIFMD in Europe, will be conducted in isolation, says Peter Callaghan, chief operating officer at SuMiTrust Fund Services (Ireland). “They are both looking to address the same thing – the role of hedge funds and the threat of systemic risk – but rather than working together, they have come up with two different reports asking for the same things.” When companies are faced with major regulatory requirements, the hope is that they can derive some kind of operational or strategic benefit from the compliance process, other than compliance itself. With Annex IV reporting this seems unlikely, at least in the short term. “I don’t see any direct benefit for either investors or managers. It is simply a cost of doing business,” says Callaghan. BRIDGE THE GAP
The only benefit for alternatives managers from Annex IV reporting is whether the information they produce gets used by their investors as part of their due diligence, or by their supervisors to bridge the gap in regulation of the alternatives market, says Kinetic’s Shrimpton.  For example, the UK’s Financial Conduct Authority (FCA) has run an annual hedge fund survey designed to inform its supervision and identify any potential systemic risk. And with Annex IV reports, the European Securities and Markets Authority is looking to do something similar – to produce anonymised and aggregate data on issues like the average levels of leverage in hedge fund strategies, or prime broker exposure. But whereas the FCA surveyed 49 hedge funds, there are likely to be more than 2,000 registered fund managers completing their Annex IV reports at the end of January. SCEPTICISM
There is also some scepticism about these kind of macro-prudential projects and the regulators’ abilities to use the data in any meaningful way. “It is one thing to identify a bubble and another thing to be able to deflate it without causing a crash,” says Shrimpton.  Meanwhile, regulators will also have to keep their initial expectations well managed, in terms of the quality or completeness of this first round of Annex IV reports, says Callaghan. “Where there is a tight timeframe for reporting on certain hard-to-value assets, managers may have to resort to an estimated net asset value as the basis for their calculations.  “Regulators have to find a balance between holding managers to prompt deadlines and enabling them to have enough time to file complete and accurate reports.” ©2014 funds europe

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