April 1, 2012 5:31 am
By Sophia Grene
Article from ft.com
Brussels appears to be returning to a harder line in its revision of AIFMD
New regulation could force hedge funds and the custodian banks that serve them out of the European Union.
A revised version of the Alternative Investment Fund Managers directive, seen by FTfm, includes provisions that could make hedge funds and private equity funds based in EU member states offer greater operational safeguards than retail investment funds.
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The banks that have custody of hedge funds’ assets are particularly affected, as they face being held liable for the safekeeping even of assets they do not hold directly.
This would push up the cost of the service to the point where some hedge funds could not afford it, and make it so onerous that some custodians might simply leave the market, say industry commentators.
“If the European authorities want depositories and want custodians, they can’t make it impossible to be in the business,” said Peter O’Dwyer, managing director at Dublin-based Trinity Fund Administration. EU regulation requires investment funds to use custodians.
Last week, the European Commission presented a revised text of the AIFMD to member states, giving them two weeks to respond to the 100-page document before it is submitted to the European Parliament for approval.
Early drafts of the AIFMD were seen as impossibly demanding in terms of the levels of operational security they proposed. Brussels and the alternative investment industry reached a compromise in the consultation stage, but the Commission now appears to be returning to the harder line of its earlier suggestions.
The revised text diverges from technical advice on implementing the AIFMD given by the European Securities and Markets Authority, and in others is more draconian than that agreed during consultation.
There is particular concern the rules for custodians may push some out of the business entirely. The revised directive says custodians should be responsible for the safekeeping of assets, even when delegated to a third party.
The definition of what is deemed to be held in custody is also controversial. Esma recommended that when official ownership of collateral is transferred to the collateral-taker, the assets should be deemed no longer held by the custodian, but the Commission’s text does not make this exemption.
Custodians would have a duty to monitor the status of such assets, possibly recalling them if the counterparty holding the collateral looked to be at risk of insolvency, or taking steps to ensure their safekeeping.
If the revised text is approved, jurisdictions such as Dublin and Luxembourg that have worked to attract alternative investment funds could suffer. Dublin has passed legislation to make it easier for offshore funds to come onshore.
This looked attractive to funds based in jurisdictions such as the Cayman Islands, because the AIFMD was expected to make it easier to sell European-domiciled funds across the EU. The revised version means funds that moved onshore may now reconsider that decision, as the costs of complying with the regulation will probably outweigh the benefits, say industry sources.
Delegating functions such as risk or investment management, standard practice among hedge funds working in one jurisdiction but regulated in another, may no longer be possible.
In addition, the relationship between European and third country regulators, while far from clear, looks unlikely to be an easy one.
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