The Commission will now prepare the Implementing Measures based on ESMA's Advice. ESMA will continue to issue technical advice to the Commission as they will publish more guidance on The Advanced method for calculation of leverage, The rules on the combination of additional funds and professional indemnity insurance and on Guidelines on Sound remuneration policies. The Commission published draft implementing rules earlier in 2012.
Asset managers must now consider the implication of the advice on their business model. What may be the costs and benefits of having the AIFM or AIF in the EU or outside the EU and what are the organisational gaps? A lot of regulatory compliance needs to be dealt with and reliance on third parties for functions such as compliance or internal audit can be a valid and cost efficient alternative. Various players are already assessing and enhancing their systems and processes and reviewing which business partners can best support them.
The depositary requirements seriously impact the way some markets currently work, especially when the depositary function for alternative assets does not exist. Most depositaries will need to thoroughly review their operational and contractual framework and pursue the right business opportunities in areas such as reporting, data management, cash management, etc. In executing their duties they will also consider relying on proper systems, independent third party opinions and providers having a global service network to cope with various local laws and regulations.
Administrators and their clients will need to find the most efficient way to produce all the required reporting depending on the business frameworks in place. Some industries are used to reporting on returns and asset statistics but much less so on risk in investment language. The transparency and disclosure requirements to both the regulator and the investors are based on the requirements in the UCITS and MiFID Directives, but have added layers to it due to the new rules around leverage, illiquid assets, liquidity arrangements etc.
Regulations such as AIFMD or Solvency II are introducing new rules in risk management which require more sophisticated portfolio risk evaluation and modelling techniques. Administrators will further be forced to look at their controls and processes and ensure they satisfy increased demands from clients and depositaries for transparency and evidence that operational frameworks are robust. In addition, more reporting from Administrators will be expected.