Working to Rules

Summer 2012


Heleen Rietdijk
Senior Manager
Regulatory Risk Consulting
+44 (0) 20 7694 4510



Countdown to the new 'twin peaks' FCA / PRA model

Cause for complaint? Complaint handling under the regulatory microscope

FATCA – Recently released guidance accelerates focus on business impacts

The cornerstone for AIFMD Level II implementation

EBA guidelines on internal governance – How ready are you?

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The cornerstone for AIFMD Level II Implementation

Moving towards implementing measures...

The European Securities and Markets Authority (ESMA) published its final technical advice on the Alternative Investment Fund Managers Directive (AIFMD) – Implementing measures on 16 November 2011. This largely technical paper brings further clarity to many fundamental issues in the Directive. However the EU Commission is under no legal obligation to follow the full advice and might take a different approach on certain issues. The advice should therefore be considered as guidance for industry participants, awaiting further steps.

Our briefing note sets out the major points of interest that are contained in ESMA's 500-page paper.

At present many in the industry have carried out a high level impact assessment on their business based on the text of the Directive, with considerable discussions on the pending implementing measures. Given the magnitude of comments made on the consultation paper, the final advice is unlikely to be greeted by applause across the entire industry. However, whilst ESMA's technical advice is not the last step, it clearly brings more clarity, from which decisions can be based and actions considered. The time is also right to consider any first mover advantage.

Next steps

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.

ESMA's advice covers four broad areas (please click on the links for more detail):

  1. General provisions for managers, authorisation and operating conditions.
  2. Governance of Alternative Investment Funds' (AIFs) depositaries.
  3. Transparency requirements and leverage.
  4. Third countries.

Contact Us

Heleen Rietdijk
Senior Manager
Regulatory Risk Consulting
+44 (0) 20 7694 4510

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