September 2014

GLOBAL CUSTODY: From here, to Emir

VaultCustodians and fund managers are marching onwards with adapting to the AIFMD. Other regulations, such as Emir and T2S, are likely to become dominant in the year ahead, custody bosses tell Funds Europe.

PHILIPPE RICARD
Head of asset & fund services, bnp paribas securities services

What developments in your fund management client base have been most noteworthy?
Global fund distribution has again been a major theme this year. Fund promoters from Europe, USA, Asia and now Latin America want to grow their investor base internationally. 

Beyond Ucits, they actively use diversified cross-border structures including RQFII schemes, re-domiciliation of funds in preparation of Asian fund passports, and global/local master-feeder structures. 

Fund promoters are also setting up global alternatives fund platforms to be distributed on a global basis with a focus on real estate, loans and global infrastructure funds.

How has the AIFMD affected the servicing requirements for your client base in the past year? Which regulation do you expect to dominate in the next 12 months?
Clients have been affected by the AIFMD in terms of compliance, regulation, new business, risk management and increasing costs. They need to comply with regulation and get approvals to set up fund distribution. 

Depo-lite requirements have emerged for non-European asset managers seeking to distribute non-European alternative investment funds into Europe. American players – previously quite unaffected – are now turning to depo-lite services to place their funds in Europe. We provide full regional depositary coverage and enhanced core and add-on services across all regions. Emir [European Market Infrastructure Regulation], Dodd Frank and Mifid II [Markets in Financial Instruments Directive] will dominate the coming year.

PAUL NORTH
Head of product management, EMEA, BNY Mellon Asset Servicing

What developments have been most noteworthy?
Despite a flow of new monies into European funds, they continue to experience cost pressures, not least due to regulation. Fund ranges and operating models are being rationalised, opening up outsourcing opportunities for us. 

We’ve seen a shift to alternative investments, which is generating demands for improved governance, risk reporting and transparency. Institutional investors are using managed accounts as a mechanism to invest in hedge funds that allows for greater customisation, liquidity and control.

Collateral management is front of mind, with an appetite for a broader set of collateral types, and a focus on optimisation rather than transformation of collateral.

Risk management is driving demand for sophisticated solutions to help firms make informed investments. Demand for information and data management tools grows, not least due to increasing complexity around regulatory reporting. Global distribution solutions are on the agenda, with a focus around proposed Asian passports and access to China

How has the AIFMD affected servicing requirements?
We’ve been servicing clients under AIFMD since late 2013 and when the July 22, 2014, authorisation deadline arrived we were acting as AIFMD depositary for over 70 clients.

Our recent AIFMD research highlighted a compliance shortfall among alternative investment fund managers (AIFMs).  Eighty-two per cent of managers had the required AIFM structure in place, although 44% had not received approval from their local regulator by the July deadline.  

The survey also showed a material increase in AIFMD associated costs to a mean of around $400,000.  Respondents expected regulatory reporting (74%) and risk and compliance reporting (58%) to incur the greatest one-off costs, and indeed to account for the bulk of ongoing AIFMD compliance costs. 

Looking forward, Ucits V, Fatca [Foreign Account Tax Compliance Act] and FTT [Financial Transaction Tax], money market fund regulation, MiFID and EMIR will all dominate the regulatory agenda.

PIERRE CIMINO
Member of the executive committee, Caceis

What developments in your fund management client base have been most noteworthy?
Over the past year, we have noted a definite uptick in the amount of private equity and real estate assets we are being asked to service across the various entities of our group. This is due to both external and internal factors; a growing market for “PERES” [private equity-real estate] products in general and a sales campaign targeting the managers of the products.  Our German branch has been particularly successful in this area, due to AIFMD-related legislation that requires such funds to appoint a depositary.   

We have also noted that a growing number of fund management clients are consolidating their various fund ranges into structures domiciled in Luxembourg.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year, and which regulation do you expect to dominate your time in the next 12 months?
AIFMD has taken up much of our resources in terms of lobbying, regulatory watch, systems adaptations and communication in order to prepare ourselves and our clients for its implementation. We have kept our clients informed of all AIFMD-related developments, and also designed a specific service to assist them in achieving compliance with the directive. We expect T2S [Target2-Securities], Ucits V (and potentially Ucits VI) as well as Emir to utilise the most resources over the next 12 months.

KRISTIN CASTELLANOS
Global head of fiduciary and trustee services, Deutsche Bank

What developments in your fund management client base have been most noteworthy?
The most noteworthy development in our fund management client base has been the growth of assets from US based alternative investment fund managers that have appointed Deutsche Bank as their depositary for alternative investment funds which market their shares in countries, such as Germany and Denmark.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year? Which regulation do you expect to dominate your time in the next 12 months?
AIFMD has affected our servicing requirements in terms of the reporting and due diligence we require from sub-custodians as well as the build of bespoke systems to track cash flow monitoring, asset safekeeping and oversight functions.

JOHN VAN VERRE
Head of global custody, HSBC Securities Services

What developments in your fund management client base have been most noteworthy?
There continues to be convergence between traditional and alternative assets and fund structures which is helping increase the asset flows from institutional investors. Regulatory change is placing huge demands on clients with associated costs not being passed on to investors but instead being offset by increased standardisation of processes, procedures and frameworks, commonly associated with larger asset managers resulting in lower total expense ratios. Service providers need to provide more granular levels of data to comply with investor/regulatory reporting. We are also seeing increased operational due diligence exercises employing consultants.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year, and which regulation do you expect to dominate your time in the next 12 months?
Clients affected by AIFMD require depositary services which includes cash flow monitoring and oversight of assets. AIFMD has also resulted in increased client demand for enhanced reporting to support regulatory requirements. Many of our fund manager clients will become regulated for the first time under AIFMD; reporting, operations and organisational changes will cause issues for some. 

We expect AIFMD, Ucits, Asian passports (outside the Ucits framework), Fatca, FTT, Solvency II, EMIR, Dodd Frank, Vickers and Liikanen, Central Securities Depositories Regulation and Target-2 Securities to be the most important.

CHRIS ROWLAND
Global head of custody, JP Morgan

How has the AIFMD affected the servicing requirements for your fund management client base in the past year? Which regulation do you expect to dominate your time in the next 12 months?
The current AIFMD and Ucits V regulatory agenda presents significant challenges to all financial market participants. 

We are currently reviewing the draft of Ucits V and monitoring its progress. We anticipate finalisation before the end of the current European parliamentary term.  AIFMD forms a baseline for the rules on, for example, depositary liability, which are a significant element of the proposals in Ucits V.  We were well-prepared for AIFMD and anticipate the necessary adjustments to any final detailed rules arising from Ucits V can be easily accommodated.

TOBY GLAYSHER
Head of global fund services, EMEA, Northern Trust

What developments in your fund management client base have been most noteworthy?
Momentum is growing for the UK’s new tax-transparent fund regime, the ACS, with schemes likely to start being authorised over the coming months. A number of our clients are taking advantage of the range of opportunities – such as fund rationalisation, tax efficiency, greater distribution and oversight – presented by the ACS.

Investment operations outsourcing remains a key focus as our clients continue to face increasing operational challenges from regulations and investor demands, and look to position their business to take advantage of new product and distribution opportunities.

We are also seeing increasing growth in the European hedge fund sector, and have supported a number of key industry startups.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year? Which regulation do you expect to dominate your time in the next 12 months?
Over the past year, we have invested considerably in our custody, operations and fund administration infrastructure to provide technical and consultative support to our clients in their implementation of AIFMD. To date we have supported more than 120 clients and 500 funds helping them become compliant with the directive in multiple jurisdictions, across multiple structures and investment types.

Our focus on Emir will continue with work on account structures that will reduce counterparty risk, improve collateral transparency and offer liquidity solutions around central clearing. We are also closely monitoring the next wave of regulation including Ucits V and MiFID II.

SEBASTIEN DANLOY
Managing director, continental Europe and offshore, RBC Investor & Treasury Services

What developments in your fund management client base have been most noteworthy?
Clients continue engaging with providers to ensure services are evolving with the shifting regulatory landscape and operational environment. It is essential that providers deliver solutions aligned with regulation. There has also been a shift in client expectations towards additional services; seeking providers that can partner in pursuit of growth strategies. One trend is the increased use of new structures such as ICAVs in Ireland and SIFs in Luxembourg.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year? Which regulation do you expect to dominate your time in the next 12 months?
As a key initiative, RBC I&TS worked to enhance our services in response to AIFMD. Strategies included establishing a robust operating model to ensure funds would be managed in line with requirements, extended to include trustee and depositary services in relevant countries. A majority of fund managers filed application forms with local regulators in Q2 2014, requiring continued flexibility, dialogue and engagement to ensure requirements were met. 

Ongoing support around regulation is crucial. Over the next 12 months AIFMD will continue to be a focus in Europe, along with Fatca globally. Ucits V, bringing greater depositary responsibility, will also be important.

GÖRAN FORS
Head of sales & market development, SEB

What developments in your fund management client base have been most noteworthy?
We have seen an increase in outsourcing from the fund management client base. The trend is also for companies to outsource the management, including the set-up of a fund-management company.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year? Which regulation do you expect to dominate your time in the next 12 months?
AIFMD has resulted in an increase of real estate and private equities companies to seek our services as depository bank. During the next year we will continue to implement new services in line with AIFMD but also the changes driven by Ucits V.

ETIENNE DENIAU
Head of business development for asset management and asset owners, Societe Generale Securities Services

What developments in your fund management client base have been most noteworthy?
Enthusiasm from asset managers around the world to manufacture and distribute Ucits funds has decided us to assist these companies in launching their Ucits funds easily and speedily by designing a management company (ManCo) service. We launched a depositary-lite service offering to support asset managers with non-EU AIFs in meeting the AIFMD requirements.  

We have supported our clients to be Emir-compliant by delivering a powerful OTC derivatives post-trade processing global solution named Orchestra.

In terms of geography, we extended our presence in the CEE region to eight markets and strengthened a new presence in the UK; we will provide “hybrid” assets managers with custody, trustee, fund administration, fund distribution services.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year and which regulation do you expect to dominate your time in the next 12 months?
With AIFMD, SGSS has upgraded in the different markets its depositary offer, for duties related to cash-flow monitoring, safekeeping of assets, and controls of oversight.

For the reports required by this directive, SGSS assist its clients with a modular offer called R303, which refers to the three service levels available for this report containing 300 fields. In the next 12 months, SGSS believes that EMIR, MiFID/MiFIR will be important to consider as well as local distribution of the Ucits IV/ AIFMD funds.

Willie Slattery
Executive vice president and head of Global Services EMEA

What developments in your fund management client base have been most noteworthy?
Generally, we are seeing growth in all our domiciles, especially Luxembourg and Ireland but also in the larger European domiciles. Many domiciles are working to provide appropriate legal, tax and other infrastructure to be attractive to asset managers who wish to establish new funds. Good examples include the new tax transparent funds in the UK, and tax changes in Italy that boosted inflows into locally domiciled funds. Luxembourg and Ireland continue to be attractive to non-European asset managers who wish to establish globally distributed product. Asset managers are looking to the industry to help them tap the opportunities created by changing investor needs and new growth markets.

How has the AIFMD affected the servicing requirements for your fund management client base in the past year, and which regulation do you expect to dominate your time in the next 12 months? 

The AIFMD has had a major impact over the past year. We’ve been responding to the servicing requirements of our clients for depositary oversight services, risk analysis and reporting. This work is an extension of our core expertise in risk, regulation and alternative asset servicing. Emir and Fatca also have major implications, along with Dodd-Frank and the proposed regulation of money market funds. With the broad continuation of this regulatory trend over the next year, we expect Ucits V to have a particularly important impact.

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