Brian Bollen asks when we will see AIFMD II and the industry’s opinion on the latest European Commission legislative proposals surrounding the directive, first introduced in 2014
When will we see the Alternative Investment Fund Managers Directive II (AIFMD II), a second iteration of the AIFMD? The question is an open one, and attempted answers are surrounded by caveats that include the impact of how individual EU member states implement the directive into their respective local legal framework. If one thing can be identified as certain, it is that we ought not to hold our breath waiting.
“The European Council is now discussing various reforms and that process could last until September this year,” suggests Peter Capper, fund and investment risk specialist at the UK Investment Association. “I do not see anything concrete before the first half of 2023 and the implementation period could stretch out a further two or three years beyond that. Apart from anything else, we just do not know what kind of curveball someone might throw in the meantime.”
Capper identifies the current major debating points as financial stability (with particular reference to liquidity management), delegation (especially of portfolio management) and the openness and competitiveness of EU markets (upon which views may differ across the EU).
Sustainability, net zero and transparency, it almost goes without saying, also feature prominently in his list, though objective observers might ask awkward questions about how any of those will stand up to close scrutiny in the wake of recent events in Ukraine. Global finance and fund management do not exist in a utopian vacuum.
The drawing board
The European Commission published draft legislative proposals on 25 November 2021, with a feedback period stretching from that date to 24 March 2022.
This step forward took place as a result of the original consultation, which was launched in November 2020 and duly closed as scheduled on 29 January 2021 with 23 responses logged as received from a variety of interested entities, ranging from the European Central Securities Depositories Association in Belgium to European Association for Investors in Non-Listed Real Estate (INREV) vehicles in the Netherlands and Assogestioni in Italy.
“We are fairly happy with the proposals,” says Federico Cupelli, deputy director for regulatory policy at the European Fund and Asset Management Association (EFAMA). “Over the course of a decade or so, AIFMD has created a brand for alternative investment funds to go alongside the protection UCITS providers for retail investors.
“The two frameworks are very different but work in parallel to ensure the safety of invested assets and function well in parallel,” Cupelli adds. “The AIFMD review has raised a number of concerns and issues; some touch on a number of issues, some of which we are less concerned about than others. Overall, we agree with the commission that asset managers should remain primarily responsible for managing liquidity risk, and need a full liquidity risk toolkit to do so.”
In its formal response, Assogestioni says it welcomes the commission’s proposal for the revision of the AIFM and UCITS directives, except for some considerations with reference to the new proposals on the subjects of delegation; loan originating funds; liquidity management tools; supervisory reporting; and lastly, disclosure to professional investors.
INREV also welcomes the opportunity to provide feedback as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds.
The non-listed real estate investment industry has adapted to the requirements of AIFMD, which is generally working well, the association adds.
INREV says it therefore supports the commission’s targeted approach in reviewing the existing AIFMD framework, highlighting: “We believe that the current rules should be neither diluted nor unnecessarily augmented without careful consideration of the potential impact on managing non-listed real estate funds.
“INREV supports the fact that delegation has been explicitly recognised as a key contributor to the success of the EU fund and manager labels.’
Delegation, the INREV adds, “allows for the efficient management of investment portfolios and for sourcing the necessary expertise in a particular geographic market or asset class”.
It adds: “While there has been a desire among regulators for increased transparency regarding delegation arrangements, we note that there has been increased transparency following the introduction of the new annual notification mechanism from national competent authorities to the European Securities and Markets Authority (ESMA), focusing on certain delegations to entities located in third countries.”
Official publications are seldom the only source of information and comment. An informed and interested third-party observer helpfully provided a copy of a working document from the EU Presidency to the Working Party on Financial Services and the Banking Union Financial Services Attache?s.
Essentially, the helpful third-party explains, because the AIFMD proposal has been adopted by the commission, and as alluded to earlier by Capper, it is currently being scrutinised by the European Council and Parliament — they will both prepare their positions before trialogues begin (hence, we will not see anything final until the end of 2023).
Delving deeper
“The document referenced below [dated 28 March 2022] is a non-public document based on some of the discussions that are happening at a council level between member states,” says the informal technical and media adviser. However, the opening question in this latest round of mind-sharing relates to liquidity management tools. It reads: “There seems to be a large majority on the following package of measures regarding liquidity management tools: i) slight modification of the definition of redemption gates (partial restriction); ii) removal of side pockets and redemption in kind from the UCITS list; iii) no other tool on the list proposed by the commission, as it is still possible for each member state to add other tools at national level; iv) ESMA will prepare guidelines on selection and use rather than a regulatory technical standards”, among other rulings.
The opening question ends with: “Do you support this package?”
In the non-public document, Luxembourg (of course, the initial home of UCITS) replies: “While we agree with some of the measures we are less supportive of the proposal to remove side pockets and redemptions in kind from the UCITS list, as well as of the fact that no other tool should be added to the list.
“Regarding point (ii): we do not see the need to remove these two tools provided these are handled with precaution and an appropriate governance framework is in place, as they allow support for investor protection under certain conditions.
“Regarding point (iii): unlike what is proposed, we are in favour of enlarging the liquidity management tools-list as widely as possible in a harmonised way throughout the EU, in order to ensure availability of the broadest range possible of tools across all member states.”
For balance, the Danish response was: “We generally support the direction of the proposed package. However, we believe the so-called “short list” of liquidity management tools for UCITS (and possibly also alternative investment funds) should include dual pricing, just like it includes swing pricing.”
It adds: “This is because dual pricing is commonly used, including in Denmark, and works as an effective and well-functioning liquidity management tool in times of liquidity stress. Funds using dual pricing should not be obliged to select other liquidity management tools from the annexe as well. This would only add additional administrative burdens that do not improve investor protection accordingly.”
Outlining his opinions on the future of AIFMD, Kunal Sawhney, CEO of Kalkine Media, the investor relation group and media house, sat down with Asset Servicing Times.
He outlines: “A lot has changed on the regulatory front as far as investment funds are concerned; while the UCITS ensures that the funds being sold to the general public are regulated, the introduction of AIFMD back in July 2014 kick-started a revolutionary change in the alternative investment management industry.”
He concludes: “[AIFMD II] draft proposals are merely amendments to bring some improvement in AIFMD. Hence soon, we can see clamourings for AIFMD III, as there is wider scope to be addressed like delegation, also the reference to AIFMD third-country marketing is missing in the proposal and can make the regulation lopsided.”
