Interviewer (Simon Lovegrove): Welcome to this special financial services video. On 16 November 2011, the European Securities and Markets Authority or ESMA published its much anticipated technical advice concerning possible implementing measures for the Alternative Investment Fund Managers Directive. ESMA’s advice followed two consultations earlier in the year and unsurprisingly given the breadth and range of the possible level 2 measures comprises 500 odd pages.
Imogen starting off, in some quarters ESMA’s advice has been criticised. Why is that?
Interviewee (Imogen Garner): I think what a lot of people are saying is that it leaves a lot of questions unanswered and that's true. I mean one key example is the area of scope where we still don’t have certainty. On the other hand there are a few areas where they’ve made some really helpful and practical suggestions, for example in the area of general operating conditions where some good ideas have been carried over from MIFID and UCITS. Another thing to note is that there have been some big changes actually, between the consultation text and the final advice. Some of those are quite helpful, for example in the area of depositaries, third countries and own funds.
Interviewer (Simon Lovegrove): Mike, where does ESMA’s advice bring us to on the depositaries debate?
Interviewee (Mike Newell): Whilst there’s been a lot of helpful movement on the key area of depositary liability there’s been little if no movement, and depositaries are still liable for, strictly liable for, custody of financial instruments in their possession in the absence of external events. In that regard, the most controversial issue is that sub-custodians who are not part of their group are considered to be internal for that purpose, so that a fraud or an insolvency at the third party sub-custodian level isn’t an external event and the depositary is strictly liable.
Interviewer (Simon Lovegrove): On the leverage provisions ESMA has set out some principles regarding calculation, can you tell us a bit more about that?
Interviewee (Mike Newell): AFMs are going to have to calculate leverage using two methods. One called the gross method and the other being the commitment method. The gross method is a simplistic method for calculating liabilities by looking at aggregating all positions and any underlying positions where you’ve got derivative methods. The commitment method is adopted from the UCITS regime and its been extensively discussed before in CESR guidance, and generally this follows the gross methodology but with more flexibility for fair netting off, netting and hedging of exposures.
Interviewer (Simon Lovegrove): And there’s a third methodology, intended for more sophisticated managers called the advanced method?
Interviewee (Mike Newell): That’s right, so for most hedge fund managers with more sophisticated strategies they are going to have to notify their regulator that they wish to use the advanced method, which allows a lot more netting off of exposures using maximum loss positions.
Interviewer (Simon Lovegrove): OK, now turning to the very hot topic of third country issues, where do we stand Imogen?
Interviewee (Imogen Garner): Well there are two points, I think to make. The first is that there was an expectation that there might be a difference between ESMA’s approach in relation to cooperation arrangements for private placement as opposed to marketing using the passport. Actually ESMA hasn’t really distinguished between the two, except that it said for national private placement that arrangements have to be in place for the purpose of systemic risk oversight and this is a requirement that comes from the Directive. ESMA’s interpretation seems to have been, it’s rather unclear but it looks like they’re asking for something that’s a little bit more than just cooperation, it almost looks like they’re suggesting there should be some sort of regular reporting arrangement between the two authorities.
Interviewer (Simon Lovegrove): And just taking a step back, is this the end for ESMA’s role on the implementing measures or is there still some more to come?
Interviewee (Imogen Garner): There’s actually a lot for them still to do. When they published their advice they also published a letter that they’d sent to, for example, Commissioner Barnier, setting out six different work streams that they still need to carry out as part of their AIFMD project so there’s a long way for them to go and that deals with quite a lot of important issues, for example they’ll be looking at remuneration as part of that.
Interviewer (Simon Lovegrove): I think a lot of people will be looking very closely at ESMA’s work with the EBA on the remuneration guidelines.
Interviewee (Imogen Garner): They will.
Interviewer (Simon Lovegrove): Mike, we’ve now got ESMA’s final technical advice, where do we go from here?
Interviewee (Mike Newell): Well it’s important to remember that the technical advice is just that and so the Commission may well disagree with certain points of policy that ESMA are recommending and we may well see very different measures in the final implementing measures which are expected to be published by the Commission in March next year. Those will then be discussed between the European Parliament and the Council of Ministers and finally adopted in July 2012. In the meantime we’ve also got a discussion paper expected to be published by the FSA next January in relation to implementation here in the UK and the best place of course to track all of the developments during the course of next year and beyond is to follow our blog on the Norton Rose website.
Interviewer (Simon Lovegrove): That concludes this special video on the Alternative Investment Fund Managers Directive. As Mike said we’re tracking the ESMA level 2 advice on the AIFMD through our AIFMD blog which can be found on the Norton Rose website. Catch us next time. Bye bye.