Fund administration vox pop: “Custody rules to prevent bank runs”

Funds Europe invited survey participants to talk about the FTX fallout, which regulations to watch and the retailing of alternatives.

Clive Bellows, head of global fund services, Emea, Northern Trust

Challenges asset managers face when launching new products

Clive BellowsFor asset managers, the regulatory environment is becoming increasingly challenging. For example, if a UK product and an offshore product are not aligned, managers may end up having to have different operating models. This can be problematic.

However, the regulatory agenda is important and here to stay. Regulators are going to continue to find ways to make sure that investors are getting the product they think they bought. Managers need to be able to continue to demonstrate that.

The solution often comes back to data and how they can leverage data solutions to meet those regulatory requirements without becoming less efficient. For managers who find the regulatory environment to be a challenge, potential solutions are mostly about data availability. It is being able to have that data when they need it and in the correct formats, as well as the ability to access information in a nimble, efficient way.

Patrick Hayes, Head of alternative investors client line, securities services, BNP Paribas

How can AIFs become retail? A fund administrator’s view

Patrick Hayes

We see growing opportunities for alternative investment funds to expand their investor pool into the retail market. However, this is not without challenges, as it requires the development of deep capabilities across multiple areas.

With the increasing focus on liquidity, especially for retail investors who are used to daily dealing facilities, it is key for alternative investment funds (AIFs) to be able to provide the necessary liquidity while maintaining their investments in more illiquid and diversified asset classes. As retail investors expect more immediate access to their assets, it is also crucial to achieve flexible communication and reporting, as well as near-instant onboarding.

In addition to this, retail distribution in Europe and Asia-Pacific is fragmented, requiring strong relationships with multiple partners. AIF managers also need to manage fund schemes designed for retail investors, such as the recently revised Eltif [European Long-Term Investment Fund] in Europe.

Finally, the retail market is highly regulated with many market specificities. Managers need local compliance knowledge and robust processes to meet their evolving responsibilities and the associated costs for a high volume of clients.

Andreas Przewloka, Chief executive officer, State Street Bank International GmbH

Crypto lessons for the funds industry from the FTX fallout

Andreas PrzewlokaAn unmistakable lesson from the collapse of FTX is that while the crypto market was developed with aspirations of eliminating traditional financial intermediaries, what has been created is a marketplace that relies on powerful, vertically integrated intermediaries in the form of exchanges, custodians and asset managers.

Unlike traditional financial institutions, crypto intermediaries are in large part not subject to a regulatory framework that protects investors through segregation of proprietary customer assets or a control framework designed to ensure prudent business practices – which means increased consumer risk.

Custodians have a long history of providing safekeeping services for clients on the basis of a clearly established body of law and regulation that defines and supports clients’ ownership rights over assets held in custody.

By applying the three core principles in safe custody of client assets (separation of financial activities, segregation of client assets and proper control), crypto intermediaries would help ensure customer protection and limit the likelihood of ‘bank runs’ and the contagion in the crypto marketplace. While they may not have prevented the downfall of FTX, they would almost surely have positively impacted the manner in which FTX grew, the development of an appropriate risk oversight and control function, and the protection of customer funds.

Jean-Pierre Gomez, Head of regulatory and public affairs, Societe Generale Securities Services

If there’s one regulation to watch for in the next 12 months, it’s this one

Jean-Pierre Gomez

On April 21, 2021, The European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD).

CSRD revises and strengthens the existing rules introduced by the Non-Financial Reporting Directive (NFRD). Notably, it adds sustainability reporting in the financial reporting and will affect reports published from January 1, 2024.

The scope of companies subject to this new Directive has been widely extended. With NFRD, only 12,000 companies were covered, mainly banks and insurance companies. It now includes all large companies, listed or not, with more than 250 employees and holds them accountable for the impact on people and the environment.

CSRD impacts 50,000 European companies which comply with two of the three following criteria:
• €20 million of balance sheet
• €40 million of turnover
• 250 employees.

Concretely, these companies will have to set up a carbon report – a measuring tool of carbon footprint at a point in time. EU companies also need to start following ESG criteria and measuring their greenhouse gas emissions. Six greenhouse gas emissions have been officially recognised by international agreements.

CSRD will therefore make it possible for investors to access easily and for free raw data that they need to assess companies’ ESG performance, as well as refine their own methodologies and strategies in impact investing.

CSRD will be the key step to provide measurement and comparison expected to allow more ambitious sustainability policies in the investment industry.

*Figures are from the European Commission.

Eliane Méziani, Senior adviser – public affairs, CACEIS

The next regulation to watch out for

Eliane MezianiSFDR’s Level 2 measures provided much-needed clarification. It is clear that investment managers must report any negative impacts their investment decisions cause or any changes to the sustainability characteristics of their product range by responding to the following: Have you taken these impacts into account? How? And if not, why not?

Continued SFDR classification under Article 8 or 9 (funds integrating sustainability into their investment process) must regularly justify their status through information documents and the prospectus.

Depositaries’ non-financial duties concerning Article 8 and 9 funds are not explicitly addressed. However, SFDR establishes two baseline controls for investment managers: the minimum investment commitment to meet Article 8 or 9 classification (a percentage); and a minimum level of sustainable investments (especially for Article 9 classification).

The depositary has a role to play which is as yet undefined by regulators. Reporting templates appended to the SFDR Level 2 contain data fields for these controls and must be filed with the depositary since January 1. Nevertheless, investment managers and asset servicing companies still require further clarification on the depositary’s monitoring duties in terms of granularity, frequency, and how to handle funds with an ecolabel, such as ISR, Greenfin and Finansol. And as always, quality and accessibility of the data remain essential to performing sufficient depositary control.

© 2023 funds europe



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