For most existing UK hedge fund managers, the depositary-lite regime, which will apply in order to continue to market their non-EU funds in the EU, will take effect on 22 July 2014. Current FCA guidance states managers should notify the FCA of their chosen depositary provider(s) by 21 June assuming they are still targeting 22 July as their date of authorisation. With less than 4 months to go, time is running out.
Given AIFMD has been in the making since early 2009, the lack of preparedness in many parts of the administration and depositary industry to take on business is surprising. Despite the potential advantages of the AIFMD marketing passport few managers of EU funds have been authorised as AIFMs to take advantage of the passport. What is more, some depositaries and prime brokers continue to negotiate terms and operating models for the single depositary model which is required in order for AIFMs of EU funds to become authorised. For established providers, this has had a knock on effect on depositary-lite which has been a lower priority to finalising models for EU funds. Newer entrants, typically independent administrators seeking to provide depositary-lite services to their existing administration clients, have in several cases simply left it too late to be operationally ready in good time for the deadline. Some firms seeking to pursue UK regulatory authorisation have either only recently, or not yet, applied to the FCA. We are only aware of one firm that has admitted to clients that it won’t be ready to offer depositary-lite services by the July deadline. Managers are advised to put pressure on providers to clarify their situation.
Whilst some managers of non-EU funds will choose to rely on reverse solicitation and side-step the depositary-lite requirements altogether, many recognise that marketing in the post-AIFMD era will be a grey area for some time to come. Some managers are viewing depositary-lite as a necessary building block to manage the regulatory and general business risk of non-compliance with the marketing rules. What this means in practice is that there are going to be many hundreds of offshore funds looking to on-board depositary-lite providers in a very short period.
In normal circumstances, two months would typically be sufficient to complete on-boarding in a controlled way. Given the volume of funds involved, this is by no means a normal situation. Sufficient time should be allowed for the on-boarding process in a controlled manner and in order to ensure the manager gets the best commercial deal.
Looking at what on-boarding involves, it can take time to agree the roles and responsibilities of the depositary, prime brokers and administrator. Two way due diligence is required between the manager and provider. Legal terms require negotiation and disclosures are required in offering documents. As a general rule, leaving agreement of operating models, fees and legal terms to near the regulatory deadline will result in a more favourable outcome for providers – something a cynic would argue providers know only too well.
There are already some reports that established depositaries may experience capacity constraints or impose a cut-off for new client take-on. New entrants that are not yet operationally ready and don’t hold their regulatory authorisation are increasingly unlikely to be a viable solution for managers given the timeframes involved.
Considering these factors, managers really ought to be selecting their depositary providers in the near future. Delaying decisions could result in depositary-lite compliance becoming increasingly more difficult than it needs to be.
This Indos article was first published by HFM Week on 5th March 2014 (Issue 331) and can found by clicking here (subscribers only).