Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

2. Key Topics on the European Regulatory Agenda

Filling the gaps

interest, risk and liquidity management, valuation); to respect initial capital and ongoing own fund requirements; to appoint an independent valuator and depositary; to restrict delegation of their functions; to publish an annual report and make pre-contractual disclosures to investors; and to provide information required for oversight to regulators. It grants them the possibility to market their funds to professional investors throughout the union. It also requires Member States to ensure that they can take effective, proportionate and dissuasive administrative measures or impose administrative sanctions for breaches of the Directive. In the wake of the Madoff scandal, the Commission decided to include the first harmonised rules on depositaries in the AIFMD. The global financial crisis also exposed weaknesses and inconsistencies in the UCITS (and non-UCITS) framework with fund freezes caused by liquidity crises and rescues of money market funds that had invested in what turned to be high risk products from a credit or liquidity risk point of view; differing interpretations of the obligations and liabilities of depositaries, especially with respect to losses of assets under sub-custody; and differing sanction regimes leading to inconsistent protection of investors across Member States. While depositary issues or weaknesses in the regulatory and supervisory frameworks would have deserved a horizontal treatment, the regulator chose to address depositary issues via the AIFMD and an update of the UCITS Directive (draft Directive COM(2012)0350, hereafter UCITS V), and to approach the harmonisation of Remedying weaknesses in the UCITS framework

Completing the European regulatory framework for funds (and harmonising the duties and liabilities of depositaries) The creation of a European regulation of alternative investment funds has its origins in the Commission’s Green Paper on investment funds (European Commission, 2005 (COM(2005) 314)) which reviewed the UCITS framework from the point of view of efficiency. Following the report, a group of expert was established to study whether regulatory action at the European level was needed to build a competitive pan-European market for alternative investment funds. However, early on, the process was hijacked by politicians vituperating against hedge funds and private equity groups; the pressure to regulate the industry in a specific manner intensified as the global financial crisis unfolded although the Commission (drawing on the conclusions of the de Larosière Group and as we had pointed out in Amenc, 2007) acknowledged that the crisis had originated within the most highly regulated institutions and that hedge funds had simply contributed to transmission. A directive was drafted and presented as “an important part of the European Commission’s response to the financial crisis.” The focus had moved from fostering a competitive marketplace to improving macro-prudential oversight by better regulating and supervising any alternative investment manager with potential systemic importance. The Alternative Investment Fund Directive (adopted as 2011/61/EU, hereafter AIFMD) covers the managers of all 28 non-UCITS funds, requiring them to be authorised under the Directive; to respect operating rules (remuneration, conflicts of

28 - All managers with assets under management of EUR100 million and above, or with assets under management of EUR500 million and above provided they do not use leverage or offer redemption rights in the first five years after each fund’s inception.

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An EDHEC-Risk Institute Publication