Adoption of the Directive ISA, Was it a compromise? Part.IV

The burden of proof is reversed, the depositary and will be responsible for loss of assets under custody unless he can prove that the loss is the result of an external event, beyond its reasonable control and the inevitable consequences. The proposal adopted, which evokes a "reasonable control" of custodian, is less severe than the original text. The depository will retain the option of using the sub-delegation, initially excluded, to transfer its contractual responsibilities, which will be accompanied by due diligence work and reporting to the authorities further.

The lobbying industry seems to have paid to alleviate the new obligations. The profession can still expect some changes coming about the chain of responsibility, because it seems that the Commission expected the adoption of the Directive before opening the ISA site clarifying the responsibilities of the holders of UCITS, and this is likely to make changes at least as demanding.


The vote by the European Parliament Directive ISA shows how the negotiations were laboring among the proponents of a regulatory status quo and those seeking tighter control of the financial industry. As usual all the European players have found a compromise of the confession of all is a "lesser evil". But unlike the UCITS IV Directive which was carried by the entire profession, this directive was made reluctantly ISA and its scope is thereby limited. While hedge funds are going to have a regulatory framework in Europe but it is relatively flexible. Nevertheless, the establishment of ESMA is a breakthrough that will require the supervisor to give the EU means to realize its ambitions to acquire a globally recognized authority. The problematic status of depositories is idle and this will invite themselves to the agenda of the future Directive UCITS V. The vote of the Directive ISA is a first step and the path is far from complete.

Adoption of the Directive ISA, Was it a compromise? Part.III

The agreement on the principle of supervision by ESMA passport allows France to take the chairmanship of the G20 in a strong position on the progress of work relating to the supervision of European financial markets.

Directive ISA ruled on the delegation of function of management companies and hedge funds of their depositors. Overall it adds considerably to its terms.

The delegation function is to use a third party to perform the tasks for which an actor is originally mandated. At the management company of AIF, the delegation of two types of functions, portfolio management and risk management, will now be regulated by the Directive. A management company will want to use will now justify an objective reason to use it in order to increase efficiency in the conduct of its business. But it should also be noted that the legislative framework has eased since the adopted version includes the possibility of using the sub-delegation, the possibility of missing the European Commission proposal of April 2009. However, the reporting requirements are considerably increased and the Directive specifies that the management company may delegate to the verge of becoming a "mailbox company", a term already used in the UCITS Directive.

At the depository, the Directive makes a significant change in its area of responsibility by delegating its functions. It is imposed an obligation of result as it was until now under an obligation of means (having led the due diligence necessary to meet the quality standards expected). Although Made off has already dramatically changed the spirit of the obligations to be met by depositories, with the conviction in France of two players to repay funds whose assets were delegates at Lehman Brother, nothing was previously written in this form. The consultation on UCITS depositaries, led by the European Commission during the summer of 2009, had already identified a need for clarification of the responsibilities of trustees. It seems that the message was taken up for hedge funds.

Adoption of the Directive ISA, Was it a compromise? Part.II

The main idea of the Directive is to oversee the marketing within the EU funds alternative:

* Non-European societies and non-domiciled in Europe;
* European societies but not domiciled in Europe;

through the award of a European passport attached to the funds must undergo an enhanced transparency, the image of what the UCITS IV Directive (Undertakings for Collective Investment in Transferable Securities) is doing for European UCITS funds.

Few countries has long opposed a plea in the European passport, claiming that only a passive marketing of these funds along with the status of private placement is appropriate, given their investment strategy and level of risk. The main risk cited to support this position was to see a licensing procedure more or less flexible according to each European country. Some might be tempted to offer a more flexible regulatory framework to capture the domiciliation of funds at the expense of other countries, with the consequence of pulling down the quality of the passport. In the final stages of negotiations, France has finally decided on the European passport, provided that it is more strict, that is to say, supervised by the future European authority market supervision (ESMA) who will take office on 1 January 2011 (and not only by the public authorities of member countries). The passport will be introduced from 1 January 2013 to cohabit with the national authorities until 2016 to allow time for ESMA to adjust its standards. ESMA will ensure that non-European countries, host of hedge funds, comply with the principles of the regulations in force within the EU. It is also anticipated that in 2015 the Commission makes an assessment of the implementation of the directive and to pronounce on a possible extension of the powers of ESMA.

Adoption of the Directive ISA, Was it a compromise? Part.I

Proposed by the European Commission in April 2009, Directive ISA on hedge funds (Alternative Investment Fund Managers) was passed overwhelmingly by Parliament 11 November 2010.

The draft Directive is that born of the political will to increase the transparency and regulation of the financial sector following the 2008 crisis.

In this general hedge funds have been pilloried particularly because of their opacity and systemic risks they might pose to financial markets and on whole sectors of the economy. Designated block, the funds "alternative" yet includes wide range of industries: venture capital, buyout capital, real estate funds and hedge funds, which had all the complicated drafting of common rules in these sectors. The main projects of the Directive focused on reducing systemic risk, on increasing the power of supervisory authorities on the improvement of investor protection on earnings and on the development of a European regulated alternative management.

Lengthy discussions on this Directive have been intense lobbying by supporters of the status quo countries (UK, Ireland ...) and those advocating stronger regulation of the financial system (France, Germany, ...). Michel Barnier, European Commissioner for Internal Market and Services, has spent all his diplomacy to bring together the viewpoints around a unifying text; But at what price?


The treatment of third countries was one of the blocking points of discussion in the Council of the European Union given its potential impact in London, second in from hedge funds, representing one trillion Euros of Assets under management at end 2008.

Time mentioned, a simple refusal of the marketing of hedge funds not registered in Europe would have a major impact on the industry with approximately 60% of hedge funds are domiciled in countries offshore cons less than 5% in Europe.

The art of negotiation among management companies Part.III

The added value of management companies is based largely on the expertise of their managers. Asset management requires special expertise in research, analysis and asset allocation. Stock selection is the differentiating factor between two managers operating on a single asset class. It is illusory to believe that the outsourcing of the negotiation will generate a visible economy for clients in fund performance. The cost of passing order on the European market is marginal (around 10 basis points) with a strong competitive pressure between the brokers and trading venues. However, the hidden cost of time spent by managers to negotiate orders is increasingly important. Markets in Financial Instruments Directive are of complex activity that is not the heart of business managers. Take away this activity is a real opportunity for management companies that have the critical mass to do so. Still it must choose the organization most in tune with the business strategy and needs. There is no optimal model but a more or less well adapted to the demands of each society.

The outsourcing of the table can be made either:

* Internally within a banking group Intermediation.
* Externally within a company without any financial relationship as proposed.
Whatever model is chosen, the expected services are identical and they cover at least:

* product coverage in line with the needs of the management company enabling it to cover all stocks in its portfolios. This coverage should be as broad as possible in terms of asset classes (stocks, bonds, fixed income, OTC derivatives,) or geographical areas (Europe, Asia,)

* An immediate liquidity and maximum with the connection to all major trading venues (regulated markets) so as to capture liquidity and find the best tariff for execution. Of course, each transaction is respecting the execution policy established by the management company.

* Cutting-edge technology to successfully carry out the rules laid down in the policy of best execution. Markets in Financial Instruments Directive require proof that orders are made in the best interests of customers with traceability and archiving every transaction regardless of the broker or the place of negotiation. These investments in systems of increasing complexity are not always accessible to small societies. Beyond these basic services, independent negotiating structures develop and grow their service offerings to add value for companies seeking to offload management activities become peripheral to the image: