Regulation.. what’s going on.

Following my last couple of blogs on the results of our survey around data management and regulation,  I said I would post some information about the various regulations in each region and how they were likely to impact..

In North America, the regulators have always been to a large extent more rules than principles-based – this is not going to change – and – in the future we can in fact expect even more rules – not less.  

The US alternatives space has seen many changes,  particularly around registration, where many hedge fund managers now required to register with the SEC would previously have been exempt – this is causing many European hedge fund operators to consider their long-term strategy in the US. The implication of registration is that full books have to be maintained. Each firm must retain all data, and be able to produce records for SEC inspection. SEC examination is a particularly onerous process – with site visits, extensive questionnaires and vast demands for data.     

The movement of the Dodd-Frank bill through the senate in summer 2010 ushered in a new era of regulation in the US, and we expect to see major changes to issues such as  corporate governance, executive compensation and levels of disclosure and transparency. What we do not know yet  is how the bill will directly impact the many rules we expect to see the SEC deliver, but we do know that the bill will allow the regulators to wield significant power and to determine the level of impact it will have on the market.

With the establishment of the Financial Stability Oversight Council and the Office of Financial Research, there is likely to be a more active approach to the management of market risk. This will manifest itself in increased reporting by asset management firms and funds on areas such as financial accounts, performance data, concentrations of risk  and exposures to third parties.  Increased demands for disclosure and transparency, including filing of full portfolios could also be seen, and there may also be  demands for SEC mandated slices and views of the portfolio breakdown. Recent changes by the SEC to Money Market funds with the updates to 2a-7 are perhaps the clearest insight we have as to what to expect for the broader investment fund market – based on what we see in 2a-7 we might expect to see more rules on post trade compliance, public information filing and risk exposures.   

Meanwhile, FINRA will be continuing to focus on maintaining market integrity, protecting investors and implementing key strands of the Consumer Protection Act within the Dodd-Frank reforms.   

In Canada,  a large segment of the industry is focussed on the new ‘Point of Sale’ fund fact documents which must be presented to investors prior to writing any investment from as early as July of this year.    

Europe

European regulators are moving toward the North American model of regulation. So what was mostly regulation by principle will become regulation by rule. Tensions and strains within the EU came to the fore with French led demands for a move away from ‘light touch’ to ‘heavy touch’ winning out. Ironically though, the UK regulatory environment is probably the most rules-based of the current batch – I think it will become even more rules oriented , especially now that the FSA comes under the remit of the Bank of England.

Most discussion in the City these days though is about RDR and how the removal of commission incentives is re-shaping the sales/advice arena , with many Asset Managers now actively looking at IFA businesses and other distribution channels to give them access to the market.  

On the cross-border front, the big news is the UCITS IV directive,  and from a data management perspective the key discussion point is the KIID – or Key Investor Information Document.  The KIID much like the CSA’s Fund Facts, is a simple 2-page document that should be delivered to the investor prior to investment. With KIID I see some serious data management challenges, in particular with the scale of the narrative data management, while the quant data should be more straightforward to deal with. To complement the rollout of the KIID initiative, Germany has passed legislation mandating the delivery of ‘product information sheets’ for investment products which are not covered by UCITS IV.

On the offshore side of things, we are already seeing change in Luxembourg and Ireland – in particular Ireland where we have seen the arrival of Matthew Elderfield, a former FSA department head.   

The rise of the ‘Newcit’ – ostensibly a hedge fund in UCITS clothing – is creating a lot of regulatory discussion – while welcoming the on-shoring of some hedge funds, it is thought that many of the ESMA regulators hope that hedge funds will migrate towards the Alternative Investment Fund Managers Directive.

That’s a quick summary of the regulations I think will impact reporting and therefore might cause data management issues. We’re still seeing regulation as the major hot topic at industry conferences – everyone is talking about it and trying to get prepared for change.

Regulation Survey Results: Part 2

This piece is a follow-up to my most recent blog posting on the results of our recent “data management and regulation” survey. I think the survey gave us a good chance to get a snapshot of what people are concerned about in terms of upcoming regulation and how it will impact their business processes.

The last posting was getting very long so I only posted some of the results. I finished up talking about the regulations that people were most concerned about in North America. The third question in our survey concerned European regulation and the topical issues there.

The question was: “in Europe, which of the following regulatory discussions concerns your organization most: RDR in the UK, UCITS IV & KIID for cross border funds, AIFM for hedge funds, the rise of Newcits, the upcoming UCITS V directive or the changeover from CESR to ESMA?”

 

Not surprisingly nearly two-thirds of all respondents indicated the big discussion point in their firm was UCITS IV and KIID – if anything the surprise is that it did not have a higher response. Maybe this is because many firms have focussed so heavily on preparation that they are very confident they are well placed to deal with the upcoming requirements that UCITS IV brings as well as the ability and readiness to initiate publication of KIID documents.

Nearly 30% of respondents indicated the AIFM directive, and an additional 17% indicated Newcits were items of discussion and concern in their firm – a clear indication that alternative strategies and the hedge fund industry are key industry focus points in the years ahead.

Somewhat surprising though is the fact that UCITS V is already a discussion point for 17% of respondents – the belief here is that the depositary structures that facilitated Madoff and manager remuneration are going to be addressed – these topics will ensure this is a hot topic of conversation for years to come.

Finally 17% of respondents indicated Solvency II was a key discussion point – this will become a key topic of conversation for any asset manager that has mandates emanating from the Life and Pension sectors – the demands on risk control, asset liability, ability to be transparent and report accordingly are all hot topics in the Sol 2 world.

Next up was the question: “How prepared is your organization for dealing with upcoming changes in regulation - are you totally prepared, somewhat prepared or not at all prepared?”

 

Thankfully the vast majority of respondents are at least somewhat prepared, but surprisingly only 15% or so indicated they believed their firms were totally prepared.

So it seems like the adage – a lot done, but more to do – seems prevalent here. Most firms are aware of what needs to be done, they have plans in place, but in some cases these plans have not been fully executed.

More reassuringly, we see that only 3% of respondents indicated that their firm is not prepared at all for the changes in regulation that are coming down the tracks. Overall, the responses to this question indicate that firms are struggling to prepare for the enforcement of regulatory reform, particularly in terms of their product data.

The next question in the survey was: “Do you think that new regulatory reporting requirements will change your organization’s attitude towards data management?”

The responses to this question were most interesting…… 

Nearly one-quarter (23%) of all respondents indicated that recent regulatory changes will force their firm to totally change their processes for getting their product data into the market, while only 12% of the respondents indicated that their existing processes were fully supportable, automated and left a full statement of record to facilitate audit.

The greatest number of respondents (56%) indicated that their firms only needed to make some amendments to the existing processes in their firm, for the management of product data.

The response to this question aligns with previous responses – where it would appear that in most cases firms know what they need to do, but have not fully executed their plans.

Overall, the responses to the survey questions indicate that firms are struggling to prepare for the enforcement of regulatory reform, particularly in terms of their product data.

The final question in the survey was: “What are the biggest challenges in getting your product data to market – are they manual processes, timeliness, cost, accuracy or something else?”

 The big shock here is that just over half (53%) of respondents indicated that the biggest obstacle to getting their product data to market is manual processes, with a similar number indicating that timeliness was an impediment. It is not surprising that 40% indicated cost was a problem – this most likely results from having issues with manual processes.

Of most concern though should be the more than one-third of respondents that indicated accuracy was a problem for them. This is worrying indeed when you consider the considerable focus that has been placed on data management in recent years and the vast amount of IT dollars that have been spent trying to address the problem.

Finally the 6% other – commented that ability to maintain a statement of record or auditable trail of ownership was their greatest challenge – which is interesting – the inference we derive here is that these firms have automated processes and reasonable levels of accuracy, but proving this and showing a demonstrable audit trail to auditors and regulators alike is a particular concern.

So that’s it on our survey results – I thought they were worth sharing with a wider audience and it might give you an insight into how people are preparing for upcoming regulation.