Europe Hedge Fund Regulations Advance

Terry Flanagan

The hedge fund industry is making preparations for a regulatory structure that’s envisioned to go into effect next year.

European securities regulators have begun implementation of Alternative Investment Fund Managers Directive (AIFMD), which aims to provide a pan-European regulatory framework for asset managers.

The European Securities and Markets Authority (ESMA) in July issued a consultation paper setting out its proposals for the detailed rules underlying AIFMD. This is in response to the request for assistance which the European Commission sent to ESMA’s predecessor, the Committee of European Securities Regulations (CESR), in 2010. ESMA has to deliver its final advice to the EC by Nov. 16, 2011.

The consultation is designed to provide robust and harmonized regulatory standards for all AIFMs and enhance the transparency of the activities of AIFMs, and the funds they manage, towards investors and public authorities.

The industry has responded with efforts to improve harmonization of risk reporting to investors. For example, Open Protocol Enabling Risk Aggregation or OPERA, was recently launched as a joint industry effort to increase investor transparency, thus facilitating a better informed asset allocation to hedge funds.

“Currently, hedge funds don’t have a rule book or template and use their own assumptions around reporting for investors and the reporting of certain information,” Gerard Buggy, global head of hedge fund markets at Thomson Reuters, told Markets Media. “OPERA looks to provide a template that covers the requirements of the ESMA technical document and makes sure that information is consistently calculated, summarised and conveyed.”

Noted Henry Knapman, a managing director at UBS who was seconded to the FSA in 2009/2010 as a senior advisor on hedge fund policy, “This initiative [OPERA] could not be more timely. As the industry prepares to respond to the ESMA consultation exercise, let us hope that investors, funds, and trade organisations can all rally around this thoughtful solution.”

The proposals in ESMA’s consultation paper cover the thresholds that determine whether a manager is subject to AIFMS, governance of AIFM depositaries, and transparency requirements and leverage.

AIFMD stipulates that fund managers whose assets under management fall below a threshold of 100 million Euros without the use of leverage (or 500 million Euros with the use of leverage) will be exempt, but may choose to opt in, in which case they would be subject to all rights and responsibilities granted under AIFMD.

AIFMD aims to increase transparency of alternative investment funds and mangers. In this context, ESMA’s advice specifies the form and content of information to be reported to competent authorities and to investors.

The advice also addresses the content and format of the annual report to be prepared for each fund. In this regard, ESMA’s approach has been to recognize the existence of national and international accounting standards already in place.

Because of the potential difficulties that AIFMD could present for non-EU fund managers operating within the EU, and EU fund managers who are managing non-EU alternative investment funds, AIFMD provides a review mechanism. After a transitional period of two years, a harmonized European passport regime will co-exist with the national regimes of the member states for a further transitional period of three years, following which the national regimes will be terminated.

Certain of the implementation measures on supervision are less urgent, as they relate to the introduction of a passport for third-country entities, which would not be operational until at least two years following the transposition deadline for AIFMD.

However, the co-operation arrangements between European authorities under AIFMD have to be in place from the first day the national laws transposing the AIFMD take effect in 2013. ESMA has been working on draft proposals for these implementing measures, which will be contained in a separate consultation to be published later this year.


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