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Regulatory Compliance

Since the global financial crisis the amount of regulation being introduced that affects the investment management industry has reached unprecedented levels both in terms of volume and complexity. Investment managers are challenged with the continuous need to interpret and then implement solutions to comply with each of these new regulations,often against tight deadlines, whilst undertaking their core BAU activities. With this regulatory trend set to continue, many projects are either underway or in the pipeline and so maintaining this balance has become more and more difficult. Understandably, resourcing constraints can ensue leading to short-term or isolated tactical rather than strategic solutions resulting in an increase in regulatory and operational risk.

ISC has conducted a vast array of regulatory driven projects within investment management and other related financial servicing organisations. These have enabled a practical understanding of the potential impacts that regulation can have on operating models and ISC can advise on best practice regarding implementation.

It goes without saying that one of ISC's core strengths is project management, enabling the effective delivery of regulatory change within your organisation at a programme or project level as necessary.

ISC's emphasis when delivering any change is to integrate optimal solutions seamlessly into your operating model while seeking out and exploiting organisational synergies in the process. Regulatory deadlines may, however, precede business readiness in this regard. ISC is able to provide intermediate post-implementation support around establishing responsibility for, and delivery of, a regulatory framework that is clearly understood and does not fall through the gaps as change is implemented. This facilitates a smooth transition to BAU whilst addressing both regulatory and operational risk in the process.

Advisory - Delivery - Support

ISC's consultants have consistently delivered successful solutions across many industry regulations. In the following section we list a number of current challenges facing investment managers and further details on what we can do for each.

MiFID II

The original MiFID was implemented over six years ago (applied in the UK from 1/11/2007). It introduced competition to the EU trading landscape and provided a 'passport' for trading venues and investment firms to operate throughout Europe on the basis of authorisation in the home member state. It also introduced a number of investor protection measures.

MiFID II is a comprehensive revision of the original MiFID rules aimed at improving the functioning of financial markets in light of the financial crisis and to further strengthen investor protection. The changes are expected to take effect from 3/1/2018. The new proposals are designed to take into account developments in the trading environment, including advances in technology and gaps in transparency to investors and regulators and there are eight areas of change within the revised regulations:

  • Commodity Derivatives
  • Transparency
  • High Frequency Trading
  • Market Structure
  • Organisational Requirements
  • Trade Reporting
  • Conduct of Business Rules
  • Transaction Reporting

MiFID II Compliance Service

Solvency II Healthcheck

Solvency II became fully effective in January 2016, following a delay of 2 years, allowing the industry to meet challenges the regulation presented. With the extra time, the first delivery should have been smooth and complete, however reality is that this is still a major data challenge for most parties involved.

ISC have been involved with major institutions, in delivering all components of the Solvency II regulations, both for the initial target and the final deadline. This involvement has continued beyond that deadline, enhancing the data model by resolving issues and ensuring future proofing with increased flexibility.

Solvency II Healthcheck Service

AIFMD Compliance

The Alternative Investment Fund Managers' Directive (AIFMD) was created by the European Union to address the perceived risks associated with unregulated alternative investment funds, including private equity and hedge funds, through regulation of the fund managers operating such funds. This should also result in the following:

  • All Alternative Investment Fund Managers (AIFMs) who either manage and/or distribute Alternative Investment Funds (AIFs) have to be authorised
  • Enhanced transparency of AIFs through standardised reporting requirements
  • Establishment of a single European market for AIFs whereby authorisation in one member state is recognised (passported) across all other member states


AIFMD Compliance Healthcheck

Solvency II

Solvency II is an EU directive harmonising regulation for insurance companies across the European Union and improving risk management through a new set of capital requirements, valuation techniques, governance and reporting standards. The objective is to improve consumer protection, deepen EU market integration and increase international competitiveness of EU insurers while modernising their supervision through evaluation of risk profiles and their governance and risk management systems. It is divided into three pillars with the reporting requirements becoming mandatory as of January 2016:

Pillar 1 – Financial Requirements
Pillar 2 – Governance and Supervision
Pillar 3 – Reporting and Disclosure

There are many implications for investment managers and service providers. There is the need for increased data granularity (look through) for modelling and reporting purposes, the pressure of increased reporting frequencies (including ad hoc requests) coupled with shorter turnaround times and the need to demonstrate enhanced data governance processes that meet or exceed those applicable to insurers.

EMIR

EMIR introduces new requirements to improve transparency and reduce risks associated with OTC derivatives markets within the EU. The following obligations are or will be applicable to all entities active in the derivatives market:

  • All OTC derivative contracts must be reported in a standardised format to a trade repository
  • Certain categories of OTC derivatives which are concluded between certain categories of parties must be cleared via a central counterparty (CCP)
  • Satisfactory risk mitigation techniques (including portfolio reconciliation, portfolio compression and laying down dispute resolution mechanisms) must be implemented for all derivatives that are not cleared via a CCP

The implications for investment managers stretch from the back office all the way through to the front and in some circumstances can lead to a wholesale review of the way derivatives are used within portfolios. Reporting mechanisms will need to be established and risk management processes will need to be analysed and possibly enhanced to ensure they are satisfactory. Counterparty contracts will need to be reviewed and possibly renegotiated and efficiencies in OTC and collateral-related processes may need to be sought to make their continued use cost-effective.