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:

The art of negotiation among management companies Part.II

The idea has made its way to separate business management and negotiation. This segregation has the advantage of refocusing the business of asset managers on their heart and professionalizes the art of negotiation with the function of internal or external specialists.

Overall, the large organizations are possible for the trading activity in corporate management. The organization currently in place in most societies, is to entrust the job of negotiating with managers Organization. This model is suitable for entrepreneurial companies with a reduced size. For the latter, the separation of functions does not make sense because the economies of scale will not be sufficient to cover investment and fixed costs of a dedicated table. Consideration is still to carry out in order to study the possibility of a negotiating table outsourced Organization if they want to outsource this activity.

The first two organizations are in place historically. They remain highly topical for asset managers wishing to retain this activity in-house growth despite its complexity. Indeed, outsourcing is not always the best answer. The best evidence for activity reporting, which is considered strategic for many players despite the maturity of the market for outsourcing by the Custodians. The price test is a key element since the investment for the implementation of a table is important, the order of 1 to 4 million Euros, with a recurring cost close to 2 million Euros year. At this price, it is not opportune to embark on such a structure for less than 20 billion Euros in assets under management. Given these numbers, why reflections flourish among asset managers who are considering very seriously the outsourcing of this business after having already outsourced recovery, back office, middle office and more sporadically reporting?

The art of negotiation among management companies Part.I

Management companies are now undergoing profound changes to align their organization with their environment more and more moving. This activity is at the heart of recent regulatory changes in the regulation of European financial system. After the global changes they all are impacting the heart of business asset managers who need to rethink the scope of their job to keep the heart of their market share. There is also a strategic repositioning of universal banks with the creation of joint ventures or transfers.

Faced with such a movement, strategic thinking have addressed the issue of operational efficiency and focusing on the heart of art. Markets in Financial Instruments Directive without being itself the cause put a spotlight on the art of negotiation in most facilities asset management.

Historically, the art of negotiation is provided by the portfolio managers. These are dedicated portfolio management (analysis and monitoring of values, investment strategies, risk monitoring and ratios, respect of management objectives) but also the passing of orders. This second activity is highly time-consuming, to the detriment of the former which constitutes the real value of the managers. The introduction of Markets in Financial Instruments Directive, with the proliferation of trading venues, but also implemented the policy of "best execution" (obligation to justify the application of best execution to the client), has added trading activity. In order to process orders in the best possible conditions, management companies must connect to the main trading venues so that they can offer their customers the most advantageous terms. This search for best execution (both in terms of price, safety, reliability and traceability) requires an overhaul of the processing chain of command.