AIFMD Directive Transfer Agents. Roger Fishwick

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1 AIFMD Directive Transfer Agents Roger Fishwick Chief Risk Officer 12 th June 2014 Thomas Murray Data Services

2 AIFMD Directive reminder on depositary liability! The depositary is liable for losses of any assets held in custody (financial instruments that can be registered in an account opened in the depositary s books and physically delivered to the depositary)! For non-custody assets (such as property, private equity, derivatives) the depositary must verify AIF ownership and keep up-to-date records! Depositary liability: Only if an event (resulting in a loss) is external, beyond reasonable control and the consequences would have been unavoidable can the depositary discharge its liability. These criteria and their interpretation by ESMA make it more challenging for a depositary to discharge its liability, as the depositary will be liable for the actions of both affiliated and non-affiliated sub custodians, for example. The depositary retains liability for instances of fraud or insolvency within the sub custody network also. Accounting errors, operational failures and failure to apply the asset segregation requirements properly at sub custodian level also constitute internal events for which the depositary is liable.! Where financial instruments held in custody by a third party are lost, the depositary should be liable. However, the third party (for example a sub-custodian) can be held liable for the loss if, under the contract between the depositary (global custodian) and the third party, the depositary can prove that it has duly performed its due diligence duties and that the specific contractual requirements for the delegation of responsibility are met. In this case there is a contractual transfer of liability to the third party, the third party is directly liable to the AIF, or as the case may be, the investors of the AIF, for the loss of the financial instruments held in custody Thomas Murray Data Services

3 POST-AIFMD organisational structure AIF AIFM Depositary Fund Administrator Collateral Agent Assets in Custody Assets not in Custody! TA for AIF! FA for AIF Collateral held for AIF Prime Broker TA s for Fund Investments made by AIF Global Custodian Property Private Equity Derivatives Network of Sub-Custodians Network of Sub-Custodians Network of Sub-Custodians Thomas Murray Data Services

4 AIFMD Directive Depository Liability Under AIFMD, depositaries have to take liability for, and will need to monitor, the following:! Global Custody level Global Custodian! Sub-Custodian level network of sub-custodians! Prime Broker (and its network of sub-custodians)! Third party collateral agent (and its network of sub-custodians)! Transfer Agents for AIF target funds! AIF Fund Administrator covering! AIF Transfer Agent! AIF Fund Accountant (and valuation agent) Thomas Murray Data Services

5 AIFMD Directive Transfer Agents! What is unusual about the transfer agents for target funds that the AIF wants to invest in is that the depositary has no contractual relationship with them! This is different to the other third parties such as the global custodian and prime broker where an agreement with the depositary is put in place to regulate their relationship! Prior to AIFMD, banks acting as custodians would simply take the fund managers instructions to buy units in a fund and execute them, completing and submitting the subscription document and sending the subscription monies to the transfer agent of the target fund! The custodian would normally register the units in its nominee for the account of the client, though on occasion the units would be registered directly in the clients name! With the advent of AIFMD there was some debate as to whether the depositary was liable for loss of units in AIF target funds, and whether the liability was different if the units were directly registered in the funds name as opposed to the nominee of the custodian! However, in the working group convened by TMDS, most participants came to the conclusion that depositaries were liable and that, as a matter of practice, the units were almost always in their nominee name for the account of the client. It was accepted that, post-madoff, the regulators clearly intended depositary liability to apply to units in target funds, and thus transfer agents of target funds were clearly in scope Thomas Murray Data Services

6 AIFMD Directive Transfer Agents So what solution did Thomas Murray and the working group put together? Transfer Agent OTHER AIFMD COMPLIANCE SOLUTIONS TA can use site as a database of stock responses to complete other compliance documents Raw data autoscored Reports Proprietary Analytical RAG Assessment Report Available Thomas Murray Website Access to reports and data via secure website logon CLIENT Online Questionnaire submitted Report and raw data available to Clients Via Thomas Murray Website Client can access both raw data and questionnaire Thomas Murray Data Services

7 AIFMD Directive Transfer Agents So what solution did Thomas Murray and the working group put together (continued)?! A collectively agreed short, closed-end questionnaire was developed that provides a consistent industry-standard list of questions, based on best market practice, to TAs to minimise their workload and avoid having to deal with a multitude of bilateral requests with different questions and formats. The questionnaire was piloted with the inhouse TAs of several participants to ensure its acceptability! The questionnaire is issued via Thomas Murray s industry leading web-based tool (SupplierSelect for Financial Services), which has been designed for the increasingly regulated financial world and the proliferation of DDQs and RFIs now in use. This functionality provides responding TAs with an efficient means of meeting the information requirements of multiple depositaries where the need is the same for all, by a simple import function. It is envisaged that there will be an annual refresh of the questionnaire responses which again can be facilitated by importing and editing previous responses! Leaves control over which participants receive the TA information with TA Thomas Murray Data Services

8 AIFMD Directive Transfer Agents So what did Thomas Murray and the working group put together?! Thomas Murray, as an independent group, has been appointed to administer this data capture and maintenance model for the participants.! What is important regarding this service for a number of groups (and their legal departments) is that it is not an outsourcing model for the activity, rather Thomas Murray is acting as a data consolidator.! Thomas Murray seeks representations from the TA directly on behalf of each of the Banks participating in the service, via a specifically issued questionnaire. Each request is accompanied by an authorisation letter from the participant.! TA s control which participants receive their information! No cost to the TA and free use of website as a data repository for any other third party questionnaires. TA Monitoring Scope of Coverage! Transfer Agent Details! Operational Control! Ownership! Financial! Services/Conflicts of Interest! Regulatory/Legal! Service Standards/Reporting! Data Protection! Operational! Seniority of Review Thomas Murray Data Services

9 What does the TA Risk Assessment Report cover? Financial Risk Overall Financial Assessment High Risk Operational Risk Overall Operational Risk Assessment Low Risk Data protection Overall Data Protection Risk Assessment High Risk Concentration risk/separation of duties Overall Concentration Risk/Separation of Duties Risk Assessment Low Risk Conflicts of Interest Overall Conflicts of Interest Assessment High Risk Self administered Fund No Financial Risk Overall Financial Assessment High Risk! Automated RAG report produced from the questionnaire response once it is submitted! Covers the major TA risks identified by the working party Thomas Murray Data Services

10 What interesting TA Data has come out so far?! About 500 TA s in over 50 jurisdictions contacted so far. Less than 10 have declined to participate, but we are still in discussions with a lot!! For the 13 participants who have provided the list of TA s, over 2,500 questionnaires are required! Thomas Murray Data Services

11 TMDS AIFMD Monitoring - Solutions Risk View Through the Custody Chain Risk View Through the Counterparty Chain Market & Depositories Tracking the post trade environment surrounding protection of client assets of all invested markets (100+ markets/csds tracked) Transfer Agents Monitoring Questionnaire and automated risk report developed as part of an industry initiative Prime Brokers Risk Assessments Global Custodians Assessing and monitoring the risk and operational capabilities of your global custodian(s) Cash Correspondents Monitoring Questionnaire Sub-Custodians As above, including on-site operational reviews of all direct or indirect agents Other Counterparties Fully auditable technology providing evidence of actions Thomas Murray Data Services

12 Panellists Roger Fishwick, Director and Chief Risk Officer, Thomas Murray Data Services In 1987, Roger joined Prudential Portfolio Managers, the global investment management arm of Prudential plc, first establishing the treasury function, then as Client Services Director, setting up the client accounting/reporting unit. Subsequently, he became PPM Group Treasurer, responsible for the back office, treasury and securities lending functions, reselecting the global custodian, outsourcing UK custody, centralising futures clearing and integrating Scottish Amicable Investment Managers. In 2000, Roger moved from PPM to Thomas Murray. He is a director of the firm, and is Chief Risk Officer. Previously he had responsibility for Institutional business, selecting service providers on behalf of major institutional investors and was responsible for the Ratings of global custodians. Thomas Murray Data Services

13 Panellists Nick Curwen, Director and Head of Luxembourg Office, SS&C GlobeOp Nick Curwen is a Director in Investor Services, responsible for European onshore funds and country Head of the Luxembourg Office. Prior to moving to Luxembourg Nick ran the Dublin office from 2011 until Nick joined SS&C GlobeOp in July Previously, Nick was Head of Client Services at a European fixed income asset manager. Nick worked with a large number of European and non European clients managing the investor relations and the marketing support teams, covering all client operational aspects from subscriptions and redemption, though to newsletter letter compilations and tailored performance reporting. Prior to that Nick work for a number of fund administrators in Luxembourg. Nick has experience across a large number of on shore and off shore fund structures. Nick holds a BSc in Astrophysics from Birmingham University and passed the IMC in Thomas Murray Data Services

14 Panellists Ian Headon, Senior Vice President, Northern Trust Depositary Services Ian Headon is responsible for technical development and regulatory deployment within of Northern Trust's depositary business across EMEA. He joined Northern Trust in May He is Chairman of the Irish Funds Industry Association s Task Force on AIFMD and is a Fellow of the Association of Chartered Certified Accountants (FCCA). Prior to joining Northern Trust, he was at Bank of New York and PFPC International in Dublin. Thomas Murray Data Services

15 Panellists Richard Frase, Partner, Financial Services & Investment Management, Dechert LLP Richard Frase advises on all aspects of financial services law. He has extensive experience of the legal and regulatory aspects of the UK financial services industry, gained in private practice, in-house and with the regulators, covering both wholesale and retail markets and including regulation and compliance, derivatives and trading documentations. Mr. Frase was head of litigation at the Personal Investment Authority (later the Financial Services Authority) from , where he dealt with a range of compliance and enforcement matters involving life companies and financial advisers. He was seconded to the Securities and Futures Authority during , where he advised on policy and legal matters, and carried out extensive work on the conduct of business rules. He was a member of the London Metal Exchange and SFA arbitration panels for 10 years, sitting as an arbitrator in more than 30 arbitrations. He qualified in 1981, and subsequently became a partner in a leading law firm s corporate department from 1988 to He left the Financial Services Authority to join Dechert in Thomas Murray Data Services

16 Panellists Miles Reucroft, Editor, Thomas Murray Data Services Miles Reucroft is the editor of the Thomas Murray Data Services website. He has been with the company since February 2013 and covers a range of areas, including AIFMD and UCITS V. Thomas Murray Data Services