This is Why AIFMD Annex IV Reports Demand More Attention

Wednesday, January 22nd was a big day for a number of alternate investment funds. It was the initial Variant of Permission (VOP) filing deadline implemented by the Financial Conduct Authority (FCA). Those who made the form deadline are practically guaranteed authorization to become Alternate Investment Fund Managers (AIFMs) under the Alternative Investment Fund Managers Directive (AIFMD) by the drop dead date in July 22, 2014.

In simpler terms, the UK Financial Conduct Authority (FCA) says if a firm wishes to become a "Full-scope UK AIFMs" it must have certain permissions in place by July 22, 2014. To beat the rush, and secure authorization in July an application outlining plans to operate under the AIFMD must be submitted six months in advance. The FCA needs time, after all, to digest all the applications for authorization.

According to the FCA's website, "From 22 July 2014, the activity of managing an AIF may not be carried on by any person who is neither authorized to perform that activity nor registered… If we receive applications after 22 April 2014, we would not be obliged to determine them before 22 July 2014."

The application form itself is not complicated, there are a lot of yes or no questions along the lines of "do you have a custodian?" "do you have risk systems?" and so on. But funds are looking at the form within the context of the July deadline and answering what they will be like in July. Therefore, within six months they must implement the tools to meet all the laws and regulations outlined in the application.

Among those regulations funds agreed to is quarterly or bi-annual reporting. And that reporting can be a nightmare, says Phil Christianson, associate director at Eze Software Group. "I don't think there's a whole lot of work around filling out VOP, but there's fallout of what you've just said yes to, and many are not sure what to do to prepare for that."

To put it bluntly, AIFMD's Annex IV reports are going to be a pain in the rear. It breaks down investment portfolios, leverage ratios, exposures, risk analysis and asks complicated questions around liquidity and strategies. It can take weeks to prepare, and depending on the firm size it may be requested on a quarterly basis.

Although Annex IV ask for about 1,000 data points, parallels can be drawn to the SEC's Form PF, which asks investment managers to gather roughly 2000 data points, and up to 10,000 data points for larger firms. Approximately 60% of the Form PF's required data overlaps with Annex IV, but with some nuances (such as different leverage ratios) that prevent a simple copy and paste.

Essentially, the amount of time funds will be spending on reporting is about to skyrocket. Christianson ballparks that if one person was tasked with completing Annex IV it would take them three weeks, owing to having to track down several people in various departments to gather data sources and map them to questions inside the filing. "If you're at a fund with six people, we see a month to pull it together."

Fight Repetition with Technology

As the saying goes, if a process needs to be duplicated it should be automated. In the face of these quarterly reporting challenges, which come in addition to filings companies routinely do, companies are looking for time-saving solutions.

Fortunately, a big percentage of data regulators are asking for comes from data already stored in data warehouses. To that end, Eze Software has seen a rapid uptick in companies interested in front end interfaces for the database that pull data to facilitate filings of regulations.

For example, one of the questions asks for the long exposure to asset back securities. To answer, the client would go into the data warehouse and find the positions, then sum the exposure. Every time.

Eze's data management software offers a front end solution that maps the data gathering process to the equation so in the next quarter clients will not have to retrace their steps. "You've captured the business knowledge and locked in the power behind those questions," Christianson explains. "The data warehouse always has fresh data, so it shifts the data sets and recalculates. As a result, manual effort goes down quarter by quarter."

Repeatability is absolutely pushing US clients towards tools to help with regulations and data warehousing, he adds. "This is not going away. You have to find a way to build efficiency around this process. Clients simply can't afford to dedicate time and resources, they want to find the technology tools and build processes to make it easier and easier." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio