What fund managers will have to do differently under UCITS V

Thomas Murray Data Services' chief risk officer, Roger Fishwick particpated in a webinar with COO Connect around what fund managers will have to do differently under UCITS V. We are delighted to share with you the video of the session, as well as a synopisis of what was discussed.

- Alternative UCITS continues to grow. Hedge Fund Research data indicates the asset class has grown from €44 billion to €188 billion at present. While UCITS have historically been invested in vanilla instruments and strategies, there are some creative strategies being developed which are facilitating increased investor interest.

-There is strong interest in UCITS from Asia and Latin America in addition to Europe. However, there are various pan-Asian passport schemes being developed (ASEAN and APEC) that are generating interest in those regions and this could threaten the stranglehold UCITS has in Asia.

- The core benefit of UCITS is the pan-EU distribution passport which allows managers to distribute their funds across the EU. A core attraction of UCITS in the post-2008 environment is the transparency it affords underlying investors. AIFMD affords similar benefits such as its pan-EU distribution passport, and it is hoped there will be similar interest too.

-Another benefit of UCITS is that they are onshore (usually Ireland or Luxembourg) and this appeals to conservative institutional investors in the EU, many of whom are nervous or contractually prohibited from investing into offshore fund structures due to their perceived lack of regulatory oversight.

- There is a somewhat bizarre situation where investors into AIFMs under AIFMD have more protections than those investing into UCITS despite the former being overwhelmingly institutional and the latter geared towards retail. There is likely to be an alignment of these two regulations over time.

- One of the core differences between AIFMD and UCITS surrounds depositary liability. Both directives require the appointment of a depositary to provide safekeeping of assets, cash-flow monitoring and oversight and subjects them to strict liability for loss of assets at the sub-custodian. AIFMD depositaries, however, have negotiated contracts and indemnifications discharging liability to the sub-custodian under a handful of circumstances. Under UCITS V, this is not permitted.

- UCITS V also makes the depositary liable for assets lost at the central securities depository, something that AIFMD does not. As such, depositaries must be fully aware of the market events and issues in emerging, higher risk markets. They need to demonstrate to regulators they have been monitoring those markets.

- Depositary banks have been monitoring events in Greece and some have expertise in getting assets out of markets during times of panic or crisis. As such, depositaries feel they are well prepared to face market crises.

- Bank-owned asset managers could be forced to undertake a review demonstrating the depositary at the parent company is the best depositary for the role. However, it must demonstrate there is a functionally and hierarchically separate management structure and no conflict of interests.

- In terms of remuneration, UCITS V rules are similar to AIFMD insofar as managers have to defer around 40 per-cent of their remuneration and pay it out in approved financial instruments.

- UCITS VI – whenever it comes into fruition – is likely to clamp down on the asset eligibility criteria of UCITS amid concerns managers are shoehorning exotic strategies into the asset class. However, ESMA did try to clamp down on UCITS Commodity Trading Advisors only to find these managers started using exchange traded notes to circumvent the rules. The simplification of asset eligibility in UCITS is part of the regulator’s efforts to make AIFMD an institutional product and UCITS strictly retail.

- UCITS V outlines sanctions for non-compliance including the ability to temporarily ban or permanently ban bad actors. It also introduces a mechanism to publicly name individuals accused of wrongdoing and impose fines of up to €5 million and/or 10 per-cent of annual turnover. It has created a whistle blowing functionality too. Typical sanctions will be levelled at misbehaviour such as style drift, for example.

Tags: UCITS VDepositary BanksDepositary liabilityAIFMD