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Annex 4 AIFMD Reporting to National Competent Authorities

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Reporting Requirements Overview

The European Central Bank through the European Securities and Markets Association (ESMA) are looking to collate data from all Alternative Funds in order to be better placed to recognise the value of systemic risk if another market crash were to occur. The AIFMD regulations determine what needs to be reported by each Alternative Fund Manager (AIFM) for their range of funds both individually and at an aggregated level.

ESMA

ESMA have taken the opportunity to also gain information on; the level of shorting of assets, high frequency trading that may impact asset pricing, and fund liquidity. The risk measures for funds are collated covering areas such as VaR, Stress tests and leverage, but the interpretation by each Manger is likely to lead to inconsistency in the overall aggregation across Europe. Derivatives are key to the reporting, with measures of a valuation based on notional exposure of Derivatives and absolute value of FFX used to highlight the risks in a fund.

ESMA has issued guidance for how to complete the reporting with follow up questions and answers, along with the technical specifications for delivery of the XML file. These guidelines have inconsistencies with more clarification in the question and answers, but some areas will still result in differing interpretation such as the treatment of overdrawn positions at the period end. Are these to be treated as leveraging, borrowing or funding or even as all three?

Timeframe for Delivery

The timing of the first reporting period is the first full calendar quarter after the AIFM has become authorised by its National Local Authority. With a number of AIFMs getting their authorisation in July, the first major volume in reporting will be January 2015. Together with the usual year end reporting activities and resources will certainly be challenged at both the AIFM and their service providers, who need to provide the cleansed data or the full report.

The report needs to be submitted to each National Competent Authority by the 30th of the month following the calendar quarter end, which would be a challenge but even more so with Bank Holidays in January and April. This will be even more of a challenge for monthly pricing funds who have historically taken their time in agreeing the fund's net asset value and pricing, as this is not be required with any urgency to completion the dealing activity. The alternative funds are an even greater challenge as they hold more illiquid assets that are harder to price.

Submission Process for FCA

Once all data has been collated after the release of the fund price, that allows aggregation across the AIFMs funds, the task is then to submit the report to the National Local Authority. For those AIFMs who are authorised in the UK this will require submitting the report to the FCA through the Gabriel system that is used for other regulatory filings. The FCA has upgraded their system with the latest release on 20th October in readiness for those AIFMs who need to report quarter three. ESMA have updated the technical guidance to use XML version 1.2 to fix issues uncovered in version 1.1 causing conflicts such as negative values per region in the geographical focus question set.

FCA

The October release of Gabriel requires the manual adjustment of reports to overcome the conflicts in this version. There has been no announcement when Gabriel is to be upgraded to version 1.2. The system is available for testing by AIFMs who are advanced enough to have a report ready for submitting. The National Code, as a unique identifier in the report, is a mandatory field, but the reference codes were not issued at the time of authorisation. There is no set date for the issue of these, but it is assumed these will be issued per AIFM and AIF prior to the year end, as either Product Reference Numbers (PRNs) or Fund Reference Numbers (FRNs).

Approaches to report production

There are various options available to AIFMs. They can begin at a basic level completing the excel template issued by ESMA and then converting it to XML or simply creating a PDF. There are some vendors who can perform the XML conversion cheaply. The next level is for AIFMs to add the data collating and report production to their data warehouse, or at least use the data available from this system as the source for the majority of data items.

As most of the data could be with an outsourced service provider, some AIFMs have added the report production as an additional service. The outsourcing of the report production can benefit where interpretations are required in treatment. The report ownership still resides with the AIFM, so the service may require some review and authorisation of the report, as well as the actual submission. There are systems that have been used for other regulatory reporting, such as the U.S. Form PF, that have been adapted for the review and authorisation stages. These systems come with exception comparison reporting helping to ensure consistency between the quarters in how funds are reported.

Data Challenges

Even with the outsourced model there are data areas that are new for AIFMD and the first challenge is the breakdown of the valuation into 65 classifications. These are unique to this regulation and although some vendors are able to supply them, there is a great deal of interpretation on how to treat assets; with some reference data only existing at the fund manager, such as the hedging or investment usage of forwards. Having an additional classification to manage will be a challenge for the reference data areas of AIFMs.

Having to reconcile and report the trading activity and transactions for the quarterly period would be a check not currently performed by the fund accounting teams until the year end. For both daily and monthly pricing funds this is an additional challenge. A further challenge is the treatment of assets under custody where it is difficult to create the Counterparty exposure. This is recognised by ESMA. The introduction of investor recognition fields that were not captured at the time of dealing has created more work. If these fields have not been captured during dealing, then this is a mammoth for AIFs with a large volume of investors.

Sharing between Jurisdictions

Obtaining authorisation was closely followed by each AIFM completing their Marketing Passporting to enable their funds to be continued to be sold in other European countries. This process is different per country and there is an expectation that the reporting, as shared by the National Authorities, will require data that could be treated as optional and therefore not currently completed. At this stage these extra requirements are not been identifiable and there could be a need to revisit the models built for report production.

The sharing of the data will take time for each jurisdiction to assess. This maybe after they have focused on the reporting from their own country. Each market is likely to interpret and treat the reporting to their own requirements. The ESMA guidance allows the setting of extra requirements and as with the passporting, this may be used to tighten the access to cross border fund selling.

What are the consequences?

An AIFM gets to their first reporting date and cannot fulfil the mandatory fields in time, so do they spend longer working on the data or send in what they have to ensure they meet the deadline? There are no clear criteria of what to do, but the FCA have issued a £250 fine per reporting fund for late delivery, so this is likely to lead to on time reporting, but not necessarily quality data. The reputational damage of sending inaccurate data will firstly be hard to detect and is only likely to come to light if a fund defaults.

PenaltyCharge Notice

During some AIFMD events the FCA have indicated that there may be a grace period for AIFMs to work on improving the availability and quality of their reporting. This could be a year to 18 months as the reporting beds down, but again this is not certain and if a fund failed during this period, then the regulators are unlikely to be so accepting of what was reported. This uncertainty has resulted in most AIFMs working hard to get their reporting both as complete and as accurate as possible.

Where to go to for help?

As always, where the asset management industry has a regulatory challenge the IMA is most helpful in giving guidance on how to deal with the process and the interpretation of the guidelines. Further to this, many AIFMs have joined forces to create a number of Support Groups discussing how each has coped with the issues. Both ESMA and the FCA have provided many question and answer publications, but finding the right question to match with your own circumstances is an art form. The FCA offer further help with the Gabriel support email address on specific submission type issues, but generally refer to ESMA as they do not have capacity to cope.

If these have all been explored, or you need advice in how best to tackle the operation for report production, then ISC can offer guidance, support or establish the operating model.

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