Amidst the flurry and bluster of the Alternative Investment Fund Managers Directive (AIFMD), firms have been crossing their fingers that they are one of the lucky few that will profit from the new rules.
Amidst the flurry and bluster of the Alternative Investment Fund Managers Directive (AIFMD), firms have been crossing their fingers that they are one of the lucky few that will profit from the new rules.
There are seven current depositories signed up in the UK (see the box on the right), and new depositories are entering into the market all the time, keen not to lose clients. KAS Bank and Northern Trust are the two latest to the craze, with both currently having applications in with the Financial Conduct Authority.
On top of a depository, some firms are creating depository-lite services for EU fund managers of non-EU domiciled funds.
SuMi TRUST Global Asset Services is one such entrant into this space. The firm, whose parent is Japanese monster Sumitomo Mitsui Trust and Banking (SuMi TRUST), came into being after it acquired an existing asset servicing platform in 2012—Daiwa Global Asset Services, which had 20 years of experience in Ireland.
In Japan, SuMi TRUST has around 40 percent market share of custody, trustee, asset administration and asset management, and $3.2 trillion dollars under custody, giving it a dominant position in Asia. Charles Bathurst, corporate and marketing advisor to the firm, explains that the team is keen to build out the SuMi TRUST brand in Europe and the US, where the firm is less well-known.
Working the kinks out
The main problem with the current attitudes towards the directive, says Bathurst, is the fact that many providers are being too hesitant about providing all of the key functions you have to do for the offshore depository.
“We’re hearing people will do cash management, but not cash reconciliation, for example. It is very interesting and I know a lot of managers are frustrated that they cannot get a clean answer from their current administrator or prime broker as to what they are prepared to do for them.”
Bathurst asserts that his prior experience with running asset management companies means that he can put himself in the shoes of the manager, who is getting a lot of conflicting advice from their lawyer, prime broker, custodian, and administrator as to what impact AIFMD will have on their business, and subsequent ability to raise assets in Europe.
“Managers are worried that the directive is going to cost a lot more money, that there will be operational interference in their business—and that it will simply create more and more bureaucracy and regulatory oversight. Traditionally, alternative funds, whether they be hedge funds, private equity or real estate, have been fairly on the periphery when it comes to the regulator’s eyesight. They are very worried they will have to become mainstream asset managers such as BlackRock or Aberdeen.”
SuMi TRUST UK’s focus, he says, is working with these types of companies to cement the fact that they themselves will not have to do anything—it is the service provider that will police their current administrator or prime broker and provide an umbrella over the top of their business.
Another problem lies within proprietary competition between each provider. The prime broker and administrator to a fund may come from different businesses, but each will insist to the fund manager that it must act as sole counterparty—the prime broker, the administrator, and the depository.
However, taking counterparty risk by putting all of your eggs in one basket is completely counterintuitive to the inherent aim of the directive.
“The problem is that there are still a number of uncertainties in the directive that prime brokers don’t want to commit to, and clients don’t know when this will be resolved. A lot of the involved community—prime brokers, trustees and administrators—might be committed to fully servicing their larger clients, because they don’t want to lose that business, but less so for smaller funds,” says Bathurst.
He adds that prime brokers are happy to still be the custodian to these smaller funds, but need someone to oversee them to ensure they’re monitoring the assets as much within the directive as possible.
Case study
“As far as we’re concerned, AIFMD is just an extension of what we have always been doing,” says Bathurst. SuMi TRUST in the UK does not have a UK depository, but rather an Irish depository that is allowed to be passported across to the UK and which can provide depository services for UK managers with non-EU funds (Cayman, British Virgin Islands, etc), that want to continue to market into Europe .
Bathurst says that the firm’s unique selling point is that it is agnostic and open in its relationship with clients. “They can select various components of our offering and don’t have to have it all, which is fairly unusual in the asset servicing space.”
It would seem that, rather than attempting to scoop up the biggest business they can, firms must instead attend to the pressing rules of the directive. Some prime brokers have clients that they don’t even know if they can safeguard under the AIFMD depository duties, and it is these that will have to commit to certain pricing, services, and understanding—and quick.
