ESMA''''s technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive doc

2011 | ESMA/2011/ 379 Final report ESMA's technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive 2 Table of Contents Acronyms used I. Executive Summary ______________________________________________________ 5 II. Introduction and background ________________________________________________ 7 III. Article 3 exemptions _____________________________________________________ 16 III.I. Identification of the portfolio of AIF under management by a particular AIFM and calculation of the value of assets under management __________________________________________ 16 III.II. Content of the obligation to register with national competent authorities and suitable mechanisms for gathering information ___________________________________________ 21 III.III. Opt-in procedure ________________________________________________ 23 IV. General operating conditions _______________________________________________ 25 IV.I. Possible Implementing Measures on Additional Own Funds and Professional Indemnity Insurance ______________________________________________________________ 28 IV.II. Possible Implementing Measures on General Principles ________________________ 39 IV.III. Possible Implementing Measures on Conflicts of Interest ______________________ 52 IV.IV. Possible Implementing Measures on Risk Management ______________________ 60 IV.V. Possible Implementing Measures on Liquidity Management ______________________ 73 IV.VI. Possible Implementing Measures on Investment in Securitisation Positions ________ 82 IV.VII. Possible Implementing Measures on Organisational Requirements ______________ 98 IV.VIII. Possible Implementing Measures on Valuation ____________________________ 111 IV.IX. Possible Implementing Measures on Delegation ___________________________ 120 V. Depositaries __________________________________________________________ 136 V.I. Appointment of a depositary ____________________________________________ 139 1 Contract evidencing the appointment of a depositary ___________________________ 139 1.1 Particulars of the contract appointing the depositary __________________________ 140 1.2 ESMA’s justification for not providing a model agreement ______________________ 143 V.II. General criteria for assessing the effective prudential regulation and supervision of third countries 144 V.III. Duties of the depositary______________________________________________ 147 V.IV. Depositary functions ________________________________________________ 150 1 Depositary functions pursuant to §7 – Cash monitoring__________________________ 150 1.1 Cash flow monitoring _______________________________________________ 150 1.2 ESMA’s justification for not providing further guidance in relation to the depositary’s duties regarding subscriptions in the AIF ___________________________________________ 154 2 Depositary functions pursuant to §8 – Safe-keeping duties _______________________ 155 2.1 Definition of the financial instruments that should be held in custody ______________ 156 2.2 Conditions applicable to the depositary when performing its safekeeping duties on each category of assets _______________________________________________________ 159 3 Depositary functions pursuant to §9 – Oversight duties __________________________ 164 Section 2 Due diligence duties ____________________________________________ 172 Section 3 Segregation __________________________________________________ 175 V.V. The depositary’s liability regime ________________________________________ 178 1 Loss of financial instruments ____________________________________________ 179 2 External events beyond reasonable control __________________________________ 182 3 Objective reason to contract a discharge ____________________________________ 185 VI. Possible Implementing Measures on Methods for Calculating the Leverage of an AIF ________ 188 Date: 16 November 2011 ESMA/2011/379 3 VII. Possible Implementing Measures on Limits to Leverage or Other Restrictions on the Management of AIF 212 VIII. Transparency Requirements _______________________________________________ 217 VIII.I. Possible Implementing Measures on Annual Reporting ______________________ 218 VIII.II. Possible Implementing Measures on Disclosure to Investors ___________________ 229 VIII.III. Possible Implementing Measures on Reporting to Competent Authorities ________ 234 IX. Supervision __________________________________________________________ 240 IX.I. Co-operation arrangements between EU and non-EU competent authorities for the purposes of Article 34(1), 36(1), and 42(1) of the AIFMD _____________________________________240 IX.II. Co-operation arrangements between EU and non-EU competent authorities as required by Articles 35(2), 37(7)(d) and 39(2)(a) of the AIFMD __________________________________240 IX.III. Co-operation and exchange of information between EU competent authorities ______ 244 IX.IV. Member State of reference: authorisation of non-EU AIFMs – Opt-in (Article 37(4)) __ 245 Annex I: Commission’s request for assistance Annex II: Cost-benefit analysis Annex III: Advice of the Securities and Markets Stakeholder Group Annex IV: Feedback on the consultations Annex V: Pro-forma for AIFM reporting to Competent Authorities (Article 24) 4 Acronyms used AIF Alternative Investment Fund AIFM Alternative Investment Fund Manager AIFMD Alternative Investment Fund Managers Directive (2011/61/EU) AuM Assets under management CCP Central counterparty CEBS Committee of European Banking Supervisors CESR Committee of European Securities Regulators CFD Contract for difference CIU Collective investment undertaking ESFS European System of Financial Supervision ESMA European Securities and Markets Authority ESRB European Systemic Risk Board GAAP Generally Accepted Accounting Principles IASB International Accounting Standards Board IFRS International Financial Reporting Standards IOSCO International Organization of Securities Commissions MiFID Markets in Financial Instruments Directive (2004/39/EC) NAV Net asset value OTC Over-the-Counter UCITS Undertaking for Collective Investment in Transferable Securities UCITS Directive Directive 2009/65/EC VaR Value at Risk 5 I. Executive Summary Reasons for publication On 2 December 2010 the European Commission sent a request for assistance to CESR (now ESMA) on the content of the implementing measures for the Alternative Investment Fund Managers Directive (AIFMD) 1 . This paper sets out ESMA’s technical advice on the content of the implementing measures 2 for the AIFMD. Contents This paper sets out ESMA’s advice for implementing measures regarding the issues identified in the Euro- pean Commission’s request. The formal advice is contained in the boxes in Sections III to IX of the paper, while further commentary and explanation is provided in the explanatory text. A cost-benefit analysis of ESMA’s advice can be found in Annex II, followed in Annex III by the formal advice provided by ESMA’s Securities and Markets Stakeholder Group. Feedback on the public consultations is set out in Annex IV. General provisions, authorisation and operating conditions This section includes advice on the implementing measures foreseen under Article 3 of the Directive, which cover the following issues: • the identification of the portfolios of alternative investment funds (AIFs) under management by a particular alternative investment fund manager (AIFM) and calculation of the value of assets un- der management (Article 3(2)); • influence of leverage on the assets under management (Article 3(2)); • the determination of the value of the assets under management by an AIF for a given calendar year (Article 3(2)); • the treatment of potential cases of cross-holding among the AIFs managed by an AIFM (Article 3(2)); • the treatment of AIFMs whose total assets under management occasionally exceed and/or fall be- low the relevant threshold (Article 3(2)); • the content of the obligation to register with national competent authorities and suitable mecha- nisms for gathering information set out in Article 3(3); • the registration requirements for entities falling below the thresholds set out in Article 3(3); and • the procedures for small managers to ‘opt-in’ to the AIFMD set out in Article 3(4). As regards general operating conditions, the advice covers the following elements: 1 http://ec.europa.eu/internal_market/investment/docs/alternative_investments/level2/mandate_en.pdf 2 This paper uses the term ‘implementing measures’ as a generic term to refer to delegated acts and implementing acts. 6 • initial capital and own funds; • conflicts of interest; • risk management; • liquidity management; • general principles; • investment in securitisation positions; • valuation; • delegation of AIFM functions; and • organisational requirements. Depositaries This section sets out ESMA’s advice on the contract evidencing appointment of the depositary, general criteria for assessing the effective prudential regulation and supervision of third countries, depositary functions, segregation obligations, loss of financial instruments, external events beyond reasonable control and objective reasons to contract a discharge. Transparency and leverage The advice under this heading covers the definition of leverage and appropriate methods for its calcula- tion, the content and format of the annual report to be prepared by the AIFM, disclosure to investors, the use of information by competent authorities and limits to leverage. Supervision This part of the advice focuses on the co-operation arrangements to be put in place with third country authorities pursuant to Chapter VII of the Directive. Next steps The European Commission asked ESMA to submit its advice by 16 November 2011. The Commission will now work to prepare the implementing measures in light of ESMA’s advice. 7 II. Introduction and background 1. The European Commission’s proposal for a Directive on Alternative Investment Fund Managers was published in April 2009 3 . Following intensive negotiations among the co-legislators over the period that followed, a political compromise was reached on the draft Directive in October 2010. The follow- ing December, the Commission sent a request to CESR (now ESMA) for technical advice on the de- tailed implementing measures that should form part of the AIFMD framework. The Commission’s re- quest is split into four parts: • Part I: General provisions, authorisation and operating conditions • Part II: Depositary • Part III: Transparency requirements and leverage • Part IV: Supervision 2. This paper sets out ESMA’s advice on Parts I to IV of the Commission’s request. A summary of the issues covered under each part is included below. 3. Immediately upon receipt of the request for assistance, CESR published a call for evidence (Ref. CESR/10-1459) 4 inviting stakeholders to provide input on the main elements of the request. A total of 56 responses were received by the deadline of 14 January (the non-confidential responses are availa- ble on the ESMA website 5 ). The feedback to the call for evidence and additional discussions with ex- ternal stakeholders were taken into account in the development of ESMA’s draft advice that was pub- lished for consultation in two stages. The first stage was the publication of a consultation paper (CP) in July covering the first three parts of the Commission’s request (ESMA/2011/209) 6 , followed by a second CP in August that addressed Part IV of the request (ESMA/2011/270). 7 ESMA received 104 and 49 responses to the two CPs respectively (the non-confidential responses are available on ESMA’s website 8 ). Open hearings on the two consultations were held at the ESMA premises in Paris; the first on Friday 2 September, the second on Monday 26 September. 4. The final text of the AIFMD, which will take effect in July 2013, was published in the Official Journal on 1 July 2011. 9 All references to articles of the Directive in the advice relate to that version. Part I: General provisions, authorisation and operating conditions Article 3 exemptions 3 http://ec.europa.eu/internal_market/investment/docs/alternative_investments/fund_managers_proposal_en.pdf 4 http://www.esma.europa.eu/popup2.php?id=7318 5 http://www.esma.europa.eu/index.php?page=responses&id=176 6 http://www.esma.europa.eu/popup2.php?id=7625 7 http://www.esma.europa.eu/popup2.php?id=7702 This paper also covered third country aspects of the requirements on delegation and depositaries. 8 http://www.esma.europa.eu/index.php?page=responses&id=185 and http://www.esma.europa.eu/index.php?page=responses&id=188 9 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF 8 5. This section of the advice includes the implementing measures foreseen under Article 3 of the Di- rective, in respect of which sufficiently rapid progress was made so as to allow the publication of a discussion paper on policy orientations in April (ESMA/2011/121). 10 The feedback in the 17 responses received 11 was taken into account in the refinement of the proposals in the relevant part of the CP published in July. ESMA’s advice in this area covers the method to be used by AIFMs to calculate the total value of assets under management as well as the information to be provided as part of the regis- tration process and details on the opt-in procedure for AIFMs which seek authorisation. General operating conditions 6. The overall approach taken to the advice on general operating conditions has been to align the re- quirements as much as possible with the existing provisions in the UCITS Directive and MiFID, while recognising that the UCITS Directive covers retail-oriented funds. Since MiFID in many cases makes more of a distinction between retail and professional clients, the relevant provisions have been an im- portant source of inspiration in light of the fact that AIFs are generally sold to professional investors. A summary of the issues covered by the advice on this part of the Commission’s request is set out be- low. Initial capital and own funds 7. Under this part of the advice, ESMA was requested to provide the Commission with a description of the types of risk arising from professional negligence and to advise on methods for calculating the re- spective amounts of additional own funds or the coverage of the professional indemnity insurance (PII). On the calculation of additional own funds, the advice sets out a methodology based on the var- iable assets under management (AuM). The advice also includes the possibility for AIFMs to combine additional own funds and PII subject to certain conditions, as well as clarifying that a combination of several PII policies is permitted in situations where only PII is taken out (i.e. there is no combination of own funds and PII) and provided that all the risks are covered. General principles and organisational requirements 8. ESMA was requested to advise the Commission on criteria to be used by the relevant competent au- thorities to assess whether AIFMs comply with the general principles under Article 12(1) of the AIFMD (such as the duty to act with due skill, care and diligence and the need to have appropriate re- sources and procedures), as well as on the content of rules that are proportionate and necessary for the specification of the general obligations placed on an AIFM by Article 18(1) (including the need for sound administrative and accounting procedures and adequate internal control mechanisms). The advice in this area seeks to achieve an appropriate level of consistency with the UCITS and MiFID re- gimes while taking into account the diversity of AIFs and different types of asset in which they are in- vested. However, as UCITS provisions are tailored for open-ended investment funds that generally invest in financial instruments, the advice provides adjustments or exemptions for those AIFs that are not open-ended and invest in assets other than financial instruments. Regarding the organisational requirements, ESMA’s advice is based on the view that these should be applied proportionately in view of the nature, scale and complexity of the AIFM’s business and the nature and range of its activi- ties. 10 http://www.esma.europa.eu/popup2.php?id=7547 11 The non-confidential responses are available here: http://www.esma.europa.eu/index.php?page=responses&id=181 9 Conflicts of interest 9. ESMA was requested to provide the Commission with a description of the types of conflicts of interest between the various actors as referred to in Article 14(1) of the AIFMD. Furthermore, ESMA was re- quested to advise the Commission on reasonable steps an AIFM should be expected to take. These steps must be defined in terms of structures and organisational and administrative procedures in or- der to identify, prevent, manage, monitor and disclose conflicts of interest. With regard to the de- scription of the types of conflict of interest, ESMA took into account that the UCITS Directive and and MiFID Level 2 measures already set out situations in which conflicts of interest may arise. The advice is based on these Level 2 provisions and describes situations in which conflicts of interest may arise. ESMA has also considered it useful to give some examples for specific conflicts of interest, some of which are taken from the November 2010 IOSCO report, ‘Private Equity Conflicts of Interest’. 12 Risk management 10. The advice on risk management covers three main topics: i. the establishment, organisation, role and responsibilities of a permanent risk management function, including requirements in respect of its reporting to senior management and its func- tional and hierarchical separation from other operating units including portfolio management; ii. the establishment of a risk management policy and the process and frequency for the assess- ment, monitoring and review of this policy; and iii. the processes and techniques for the measurement and management of risk including the use of qualitative and quantitative risk limits for certain types of risk. The existing provisions on risk management in the UCITS Directive and MiFID were taken as a starting point for the work and have in many cases been included in the advice with limited tailor- ing. Liquidity management 11. In line with the request from the Commission, the following issues are addressed in the advice on liquidity management: i. the systems and procedures AIFMs should implement to ensure the liquidity profiles of the AIFs under their management comply with their underlying obligations; ii. the content and frequency of stress tests to be performed by AIFMs; and iii. the circumstances under which the investment strategy, liquidity profile and redemption policy of each AIF managed by an AIFM can be considered to be consistent. The existing requirements under the UCITS Directive were taken as the starting point for the devel- opment of the advice. Regard was also had to industry guidance and good practice standards. 12 http://www.iosco.org/library/pubdocs/pdf/IOSCOPD341.pdf 10 Investment in securitisation positions 12. ESMA was requested to advise the Commission on the requirements for investment in securitisation positions by AIFMs on behalf of one or more AIFs (Article 17 AIFMD) or by UCITS (Article 63 AIFMD). The objective of these provisions is to ensure cross-sectoral consistency and remove misa- lignment between the interests of firms that repackage loans into tradable securities and originators within the meaning of the Banking Consolidation Directive (Directive 2006/48/EC). ESMA has also taken into account the relevant provisions of the Capital Requirements Directive (Article 122a), Sol- vency II Directive (Article 135) and the advice given by CEBS and CEIOPS respectively in this regard. Valuation 13. ESMA was requested to advise the Commission on criteria for the proper valuation of assets and the calculation of the net asset value, the type of specific professional guarantees an external valuer should be required to provide and the frequency of valuation carried out by open-ended funds. 14. On the first point, ESMA recognises the different existing valuation standards, taking into account different rules in different jurisdictions and the diversity of assets invested in by AIFs. ESMA has sought to identify general principles that should guide the AIFM in developing and implementing pol- icies and procedures for a proper and independent valuation of the assets of the AIF. Due to their general character these requirements can be adapted to the specific characteristics of the diverse types of asset in which an AIF may invest. 15. In respect of the calculation of the net asset value (NAV), ESMA has taken into account that the rules applicable to the calculation of the NAV are subject to the national law of the country where the AIF has its registered office or those laid down in the AIF’s rules or instruments of incorporation. The ad- vice also sets out some general principles on the calculation of the NAV. As a general rule it is consid- ered that the valuation of assets that are financial instruments must take place every time the net as- set value is calculated. However, the valuation of assets that are not financial instruments must take place at least once a year. Delegation of AIFM functions 16. The Commission’s request invited ESMA to advise on the content of rules that are necessary and pro- portionate to ensure that an AIFM fulfils the conditions for delegation of functions under Article 20(1) and (2). With regard to the criteria for objective reasons justifying a delegation, the advice sets out a general principle according to which a delegation can be justified where the AIFM can demon- strate that the delegation is done for the purpose of a more efficient conduct of the AIFM’s manage- ment of the AIF, supplemented by an indicative, non-exhaustive list of criteria to be used when mak- ing the assessment. 17. Regarding the assessment of whether an entity to which functions are delegated is of sufficiently good repute, ESMA takes the view that this is satisfied where the delegate is established in the EU and is authorised or registered for the delegated tasks and the fulfilment of the criterion has been reviewed by the competent supervisory authority as part of the authorisation procedure. In all other cases the AIFM has to evaluate whether the delegate complies with the criteria on ‘sufficient resources, suffi- ciently good repute and sufficient experience’. The advice sets out some guidance for this evaluation. [...]... consists either of custody or of record keeping, depending on the type of asset In line with the Commission s request, the advice addresses the types of financial instrument which should be included in the scope of the depositary’s custody functions and the conditions upon which the depositary can fulfil its obligation to safekeep the assets The ‘other assets’ subject to the recordkeeping obligation... Extract from the Commission s request CESR is requested to provide the Commission with a description of the potential risks arising from professional negligence to be covered by additional own funds or the professional indemnity insurance referred to in Article 9(7) CESR is requested to advise the Commission on how the appropriateness of additional own funds or the coverage of the professional indemnity... or the coverage of the professional indemnity insurance 2 Many respondents to the consultation expressed a general concern on the implementing measures relating to the additional own funds and the professional indemnity insurance requirements: on the one hand, the inappropriateness of the additional own funds rules for internally managed AIFs was highlighted; on the other hand, respondents (including... industry and the insurance sector: they asked for the introduction of the possibility to have a combination of additional own funds and professional indemnity insurance, on one side, and of a cap for the additional own funds required under article 9(7) of the AIFMD, on the other side Furthermore, the request to clarify that a combination of several professional indemnity insurance policies is possible. .. AIFM and calculation of the value of assets under management Extract from the Commission s request CESR is requested to advise the Commission on how to identify the portfolios of AIF under management by a particular AIFM and the calculation of the value of assets under management by the AIFM on behalf of these AIF The advice should identify options on how to determine the value of the assets under management... person who is directly involved in the provision of services to the AIFM under a delegation arrangement to third parties for the purpose of the provision of collective portfolio management by the AIFM ‘Retention of net economic interest’ means: (a) retention of no less than 5 % of the nominal value of each of the tranches sold or transferred to the investors; (b) in the case of securitisations of revolving... determine ongoing adjustments of the additional own funds or of the coverage of the professional indemnity insurance referred to in Article 9(7) Introduction 1 ESMA was requested to provide the Commission with a description of the types of risk arising from professional negligence Furthermore, ESMA was requested to advise on methods for calculating the respective amounts of additional own funds or the coverage... detail as to the conditions to be met for the depositary to be able to delegate any of its safekeeping functions ESMA was asked to provide further guidance in relation to the specific tasks the depositary would be expected to carry out in order to comply with its due diligence duties and, if possible, to provide a template of evaluation, selection, review and monitoring criteria to be considered The advice. .. below the relevant threshold in a given calendar year CESR is requested to advise the Commission on the obligation of AIFM to notify competent authorities in the event they no longer comply with the exemptions granted in Article 3(2) Introduction 1 ESMA was requested to advise the Commission on how to identify the portfolios of AIF under management by a particular AIFM and the calculation of the value of. .. provided to competent authorities CESR is invited to consider the consistency with its advice regarding the Issue 25 (reporting obligations to competent authorities) Introduction 19 ESMA was requested to advise the Commission on the content of the obligation to register with national competent authorities for the entities described in Article 3(2) Furthermore, ESMA was requested to advise the Commission on . report ESMA's technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive . with the request from the Commission, the advice on this point sets out ESMA’s views on the content of the contract evidencing the appointment of the depositary,