Is AIFMD the silver bullet for MiFID II?

Originally published in HFMWeek 475

In the first of a series of HFMWeek editorials on fund manager’s regulatory reporting requirements, Arkk examine the renewed favourability of the AIFMD in light of the upcoming implementation of Mifid II reporting

High volume funds are considering their options to avoid the onerous Mifid II implementation, looking instead towards AIFMD.
This quarter, a handful of fund managers have dropped their Mifid II licences ahead of January 2018’s implementation deadline. With only three months to go, those in scope are reviewing their options.

Preparing for Mifid II

Mifid II is one of the most talked about topics in the financial sector this year. Countless events, seminars and briefings have discussed how to prepare for such a vast filing requirement. The reporting requirements are substantial compared to original Mifid launched in 2004, which aligns with the more demanding regulatory reporting landscape post-GFC.

Announced in early 2016, Esma’s Mifid II extension was not well received, with commentary suggesting that there was not enough time to implement. Even 12 weeks before the January deadline, many firms are staying quiet on how they plan to cover their research costs and manage the reporting burden.

GDPR and Mifid II – the broader challenge

2018 will see the implementation not only of Mifid II but also the General Data Protection Regulation (GDPR). Some managers are questioning whether holding the 5-7 years of client information required under Mifid II will conflict with the GDPR, which prohibits keeping client information for longer than necessary.

While it’s true that the GDPR is not the vast departure from the existing Data Protection Act that some are suggesting, the new regulation does show that personal data protection is going to be a hot topic in 2018. Balancing compliance with a new data protection regulation, while trying to keep records on clients secure for a long period of time is a challenge many fund managers wish to avoid.

The conflicting focus on transparency and data protection in 2018 follows a year marked with cyber-attacks and data losses, the most notable in the UK being the WannaCry ransomware attack. High volume funds could become increasingly targeted by hackers, especially with the FCA publishing which firms are maintaining these long-term records on their clients’ activity.

Alternative investments

Introduced in 2014, the AIFMD regulated those funds not covered by Ucits. In relative terms, Mifid looked simpler as a reporting requirement, and firms obtained licences which would keep them out of scope for AIFMD and the daunting prospect of populating over 300 data points for regulator reporting.
Three years on, and the Annex IV reporting requirements no longer seem so burdensome. While filers are more educated around how to fulfil these requirements, service providers have spent this time fine tuning their guidance and XML conversion software to create sleek user experiences.
“We support clients across a range of regulatory reporting requirements, and in the past AIFMD was perceived as one of the most challenging,” comments Arkk Solutions’ managing director Richard Metcalfe. “It’s ironic that between the vast scope of Mifid II and the questions around Ucits classification post-Brexit, AIFMD is now the more appealing option.”

Moving towards AIFMD

This is not the first time fund managers have explored moving towards AIFMD. Following the 2016 referendum, firms have considered restructuring their Ucits as Alternatives Investment Funds (AIFs) to potentially avoid moving operations outside of the UK and into Europe post-Brexit.

The switch from Mifid II to AIFMD is especially appealing to high volume funds. These funds, with their multitude of transactions across the year, will have the heaviest reporting burden under Mifid II since they will need to provide data on daily movements. This would be alleviated under AIMFD, where values of transactions are reported in aggregate.

While the reporting scope of AIFMD originally seemed onerous, much of the data can be reused from each filing period by utilising a roll-forward function in the templates. This allows static data to carry over even when Esma updates the templates, significantly reducing the time spent manually entering data.

Experienced reporting

What’s most appealing for fund managers about AIFMD is its three-year history in the UK. “Software expertise and advisory support is already available for AIFMD, and experience can be shared between the 2,000+ fund managers who have filed already,” adds Metcalfe. “This is much more appealing to take on than Mifid II, a brand new challenge which no one has faced.”

Having three years of AIFMD filings also means that Esma’s updates are becoming less frequent and more manageable. “The regulator updates are still highly technical. You need a full understanding of the new schema to update the templates, which is why several of our clients approached us after struggling to maintain an in-house XML converter,” adds Metcalfe. “However, these updates are becoming less frequent. This is often the case with new regulations – the upcoming Country by Country Reporting XML schema is receiving updates from the OECD every month, and there’s no telling how many changes we could see in the first year of Mifid II.”

Variances in reporting

With just three months to go prior to implementation of Mifid II, it’s unclear how many managers will have the option to abandon their current licenses and register their funds as AIFs.

High volume funds are looking at the impact on leverage calculations. These are reported to investors under AIFMD, and may show some variances compared to the Mifid II numbers. “Our advice has been to provide some contextual narrative when disclosing leverage under a different reporting regime,” says Nick Baldwin, director of Addition Compliance, “since this helps fund managers explain any marked variances to their investors.”

Thinking about the restructure

There is speculation around the challenges of ‘AIFMD II’ but at this stage it is purely hypothetical. Over the next two years, Brexit talks are likely to detract the European Commission’s focus from any discussion of revising AIFMD significantly, and implementation for any further reporting scopes of AIFs would take several years to implement.

3 January 2018 will reveal whether Mifid II’s reputation as the most challenging piece of financial regulation is warranted. After a 12-month extension, Esma is expecting firms to implement in January 2018, which leaves very little time to restructure if managers are planning to register for an AIF licence.

High volume Funds looking to follow Tudor Investment Corp and Bevan Howard Asset Management should start seeking support as quickly as possible. This means looking at guidance on closing their Mifid licences and registering their AIFs, as well as implementing an XML AIFMD reporting solution which will guide them through their first filing deadline.

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