The European Securities and Markets Authority has published on October 1st the final guidelines on the reporting obligations for alternative fund managers under Articles 3 and 24 the European Union’s Alternative Investment Fund Managers Directive, which took effect on July 22, after incorporating changes arising from a consultation exercise with market stakeholders in June.
The guidelines set out how managers of alternative investment vehicles including hedge funds, private equity and real estate funds will be required to report certain information regularly to national regulators. They clarify provisions of the AIFM Directive on the information required, which aims to provide supervisors with a more comprehensive and consistent oversight of managers’ activities.
At the same time, ESMA has published an opinion on transparency issues in which it proposes introducing additional periodic reporting, including information such as value at risk measures for alternative funds, or the number of transactions carried out using high-frequency algorithmic trading techniques.
ESMA chairman Steven Maijoor says that now the directive has come into force, both alternative fund managers and national supervisors need to prepare for the introduction of regulatory filings that will enable supervisors to monitor the systemic risks engendered by alternative funds.
Majoor says the authority’s guidelines and its opinion on future steps will contribute to the standardisation of reporting throughout the EU and facilitate exchange of information between national regulators, ESMA and the European Systemic Risk Board.
The AIFM Directive requires managers to report on their investment strategies, exposure and portfolio concentrations to national regulators. The guidelines specify that key elements of the information that must be provided for each alternative fund include the breakdown of investment strategies followed by the fund, the principal markets and instruments in which it trades, its total value of assets under management of each fund, its turnover, and – most importantly – its principal exposures and portfolio concentration.
In addition, the opinion issued by ESMA proposes that managers be required to report additional information on the risk profile of each fund that they manage, including its risk measures, liquidity profile and leverage.
The guidelines document incorporates ESMA’s response to the consultation feedback. For instance, it has taken note of industry members who disagreed with its recommendation that existing managers of alternative funds should report for the first time by January 31, 2014 for the period between July 23 and December 31 this year, and by February 15 for managers of funds of funds.
The respondents argued that this prescription was not consistent with the transitional provisions laid down in Article 61(1) of the directive, which allow existing alternative fund managers up to one year to come into compliance, depending on the arrangements set out by their national legislation and regulators.
ESMA says it is now adopting a more principles-based approach and recommends that the nature and timing of existing managers’ reporting obligations for the period beginning on July 2013 should take into account the directive’s transitional provisions, the European Commission’s interpretation of Article 61(1) as set out in its Q&A document, and their authorisation status.
In response to requests from industry members, ESMA has clarified its position on when the period on which managers start reporting to their national regulators should begin, recommending the first day of the quarter after they have information to report until the end of the first reporting period. So a manager required to report half-yearly and that has information to report as from February 15 would start reporting information to its regulator from April 1 to June 30.
The authority has also clarified that managers should report to their regulators only once per reporting period, for the entire period. And it recommends that if managers do not have any information to report on their funds, for example if there is a delay between the authorisation or registration of a new manager and its actual start of activity, or between the creation of a fund and its first investments, managers should still report, indicating that no information is available.
ESMA has also taken into account the views of respondents who disagreed with its proposal to apply the reporting obligations of Article 24(2) of the directive to non-EU master funds not marketed in the union when a feeder fund to the master is domiciled or marketed in the EU. This article deals with reporting of funds’ liquidity issues, risk profile and management, asset types and stress test results. The respondents argued that through this position, ESMA was modifying the scope of the directive through guidelines, which it should not do.
In response, ESMA has omitted this recommendation from the final guidelines. However, it says it remains concerned by the risk in regulators not receiving the information covered in Article 24(2) for non-EU master funds in these circumstances. It therefore has included this information in its separate opinion to regulators on collection of information under the AIFM Directive, with the proviso that ESMA does not expect this information if the non-EU master fund and the feeder funds do not have the same manager.
Most respondents disagreed with ESMA’s introduction of reporting of further measures of risk for both legal and operational reasons, saying this would be an additional burden for managers that already face significant reporting obligations.
A number of respondents argued that if ESMA insisted on the reporting of VaR as an additional measure of risk, managers should be able to report other types of VaR, and that ESMA should consider further alignment with the risk measurement methods prescribed under the UCITS regime. The authority has therefore limited the guidelines to the measures of risk set out in the Commission’s Level 2 regulation.
However, ESMA remains convinced that where relevant, depending on the predominant type of the fund in question (for instance hedge funds), information on their VaR should be collected by regulators. It also believes that, where relevant to the investment strategy, further information such as the portfolio’s sensitivity to change in exchange rates or commodity prices would be useful to regulators. These additional measures of risk are therefore included in the separate opinion.
ESMA has also published on its web site at addition technical supporting material, comprising a consolidated reporting template and detailed IT guidance for filing of the XML and the XSD schema, which will facilitate managers’ reporting to their local regulators.
The guidelines are now in the process of being translated into the EU’s official languages. National regulators will have two months from the date of the publication of the translations on ESMA’s web site to confirm to the authority whether they are already complying with the guidelines or intend to do so by incorporating them into their supervisory practices.
The CSSF has announced in press release of 8 October that it will soon publish a circular that includes practical aspects of reporting and clarification on the information to be reported to the Luxembourg regulator, as well as the timing of reporting via the reporting template stipulated in Appendix IV of the European Commission’s Level 2 regulation of December 19, 2012. The CSSF invites remarks, questions and contributions from industry members and other interested parties at