EU AIFMD Negotiation Breakthrough – Good News for Securities Finance
Given that hedge funds are a core pillar of the need to lend and borrow shares, we should all be interested in some recent news on the Alternative Investment Fund Managers Directive (AIFMD). This week, EU finance ministers have agreed a PROVISIONAL draft that contains important changes to three key areas that concern securities finance. The directive will likely be put to the EU Council for ratification in the first Quarter of 2011. A good component of the improved text is thanks to the efforts of AIMA (Alternative Investment Managers Assoc www.aima.org) and other market practitioners.
Firstly, the more hedge funds in Europe, the better from the point of view of those of us who provide services to them in whole or in part. The prior directive imposed stringent asset raising rules, making it nigh on impossible for non-EU managers (the US has the lion’s share of the market) to access the EU professional investor market.
The revised version will allow three alternatives (pardon the pun) for non-EU managers to capture inflows from EU investors. The first and simplest is that reverse solicitation or passive marketing will be available. Secondly the private placement rules will be able to exist subject to a number of workable conditions and third is the passport which will be subject to a review period with strict conditions.
The second key area relates directly to Custody. Under the catchy article called, “Depositary Liability” there are positive changes that make it possible to have more than a single bank acting as a funds Custodian. The EU was keen on funds being forced to appoint just one depositor. This primary depositor must then delegate certain responsibilities which then re-opens the multi Custodian/multi Prime Broker route for funds.
Another angle to this Depositary Liability code relates to the liability for loss. Post Lehman, the EU wanted, I imagine, to make it easier for funds to get their entire loss paid back if their depositor was to fail to perform due to a failure of one of its sub-delegates (read sub-custodian) that was beyond its control. This now has a get our clause such that if the depository is able to prove their innocence to any loss because it was for reasons “beyond reasonably control.” There is further work to do here since it will be a legal bonanza trying to prove or disprove this. AIMA are still pushing here for things like “appropriate due diligence” to be mentioned.
Finally, be aware that from January 2011 a new grand master will arise in the form of ESMA. This body is the EU’s eyes and eyes for all regulations being observed across securities markets, ratings, clearing and asset management. National regulators will continue to be in charge of day to day matters but ESMA has the final say if there is a cross border issue within the EU as the final authority.
For a more explanation click here for a video interview with AIMA’s Jiri Krol talking to Deutsche Bank’s Anthony Byrne.
