The Alternative Investment Management Association, the global AI industry group, has been busy of late. Its recent publications include a Best Execution Guide for the European Union’s revised Markets in Financial Instruments Directive (MiFID 2) and a guide to fund administration.
The AIMA guide on fund administration reworks a 2009 publication on the same subject. This re-working reflects the way the modern fund administration sector has grown, the diversification of the hedge funds and other AI vehicles to be administered, and the evolution of industry transparency and outsourcing, along with much else.
The relationship between managers and administrators evolves, just as the relationship between managers ad prime brokers evolves. Indeed, the two evolutions are closely related. For example, as more managers go to a “multiple prime” model to reduce their counterparty risk, they find themselves turning over to the unitary administrator tasks for which they would once have leaned on that (unitary) prime broker.
In a statement for the press accompanying the release of the new guide, the CEO of AIMA, Jack Inglis, said: “Fund administrators are an essential part of the alternative investment ecosystem and their role has never been more important as regulations and standards have evolved since the financial crisis. We believe our new guide will be a valuable tool for alternative investment managers when it comes to navigating this complex but vital space.”
Ken Owens, asset & wealth management partner, PwC Ireland, said that PwC Ireland is “delighted to have been able to participate” in the production of the updated guide. Ireland, as Owens noted, is “the leading global center for the administration of alternative funds and we are sure that this … will be a valuable tool both to the fund administration industry and to the managers and other stakeholders” who use their services.
By way of a sample of its contents: section 5 discusses anti money laundering, know your customer, and counter-terrorism financing compliance, an area in which the manager and administrator must work together to protect each entity and the fund itself and the sources of the assets therein.
Section 6 looks at the role an administrator must play in the ascertainment of net asset value (NAV), starting from the initial trade as it is reflected in books and records, through the allocation of profit and loss, and the calculation of fees. Independent calculation of NAV is one of the core roles of an administrator. It must of course be both accurate and timely.
Also (to conclude this brief sampling), section 7 highlights the outsourcing of middle office services from manager to administrator.
MiFID Best Execution
Meanwhile as noted above, AIMA has also published a guide to managers’ best execution obligations under MiFID2, which will apply beginning in January 2018.
The rules under MiFID1 have been enhanced in a number of respects. This is not a matter for cookie cutters: what constitutes best execution will vary from one firm to another, depending on the types of financial instruments they employ and their investment strategies. This guide, which was developed in conjunction with Dechert LLP, sets out the various practical considerations of which firms will have to take account in order to maintain their ongoing compliance.
Inglis said: “We hope that our comprehensive guide will support [AIMA members] in their implementation programs. Our recent MiFID2 survey indicated that some of our members with an international presence are setting the MiFID2 best execution requirements as their global standard. This makes it all the more important to get it right from the start.”
MiFID1 came into force in November 2007, replacing and expanding on the “Investment Services Directive.”
The idea was to unify and increase the efficiency of the European financial markets. But what is known in retrospect as the “global financial crisis” was already underway when MiFID1 came into force, and the consequences of the crisis led many to press for another re-working of the system,
In October 2011 the EC published its proposals both for MiFID2 and for an accompanying regulation, MiFIR.
In April 2014, the European Parliament adopted the final texts of both: MiFID2 and MiFIR. The original plan was for a January 2017 implementation. That deadline was extended by a year, though, to allow for the building of the necessary IT systems.