Earlier this month we reminded registered and authorised AIFMs that the deadline for the first filing of their Annex IV Reports with the Central Bank of Ireland (Central Bank) was approaching.
By now AIFMs should have determined their regulatory AUM, their reporting frequency, first reporting period and which alternative investment funds are to be included in their report. They should also have made a decision on whether or not to prepare their report themselves or to retain external service providers to complete the task for them. External service providers can be given access to the Central Bank’s ONR portal to upload Annex IV Reports, but we would generally expect final ONR sign off of the Annex IV Reports to rest with staff from the AIFM.
This article provides some pointers for the preparation of Annex IV Reports and, looks at what the information contained in filed AIFM Reporting Templates might reveal.
The categories of information to be included in Annex IV Reports
The largest challenge for AIFMs preparing Annex IV Reports is to identify the information that will need to be included in the reports and decide where it will come from. There are three main categories of information that are to be included.
- Fixed data: the type of data that generally does not change, including regulatory codes, the type of fund, ISIN codes, and broad investment strategy.
- Optional data: policies will have to be devised to decide whether or not reporting is necessary for this type of data. Some optional fields (e.g. AUM value percentages by geographical exposure such as North America, Europe etc.) will become compulsory, depending on decisions to be made by the European Securities and Markets Authority (ESMA) or by the Central Bank.
- Active data: data which is constantly changing depending on the holdings of the AIF, its transactions and investor concentrations.The big challenge for this type of data is that AIFMs will need to have systems in place to enable them to take a ‘snap shot' of all of the AIFs that they manage as at the relevant reporting cut-off time.
Data collation, policy and analysis
In order to make their Annex IV Report meaningful, AIFMs should examine where they are going to source the information that is to be included in the report. For fixed data, most of the information (such as Central Bank Code, Company number, ISIN, etc.) should be readily available from Central Bank or other registers. For optional data and active data, where decisions must be made in relation to what to include, where to source information and how to carry out some of the calculations required; AIFMs should consider putting in place a policy document to show how decisions and calculations are made to ensure that a consistent approach is taken in subsequent submissions of the Annex IV Report.
The types of decisions that will have to be made include:
- Identifying data sources for holdings of funds, transactions, ESMA classifications of assets and transactions, investor concentration, counterparties and derivative holdings.
- Evaluating the best sources, where there is more than one source for certain information.
- Deciding whether it is possible to improve the data used, for example, by coding ESMA classifications into general reporting on holdings.
- Defining the basis on which investment strategy for funds is broken down and how the percentages for each are calculated.
- Examining all risk data to be reported on and deciding on the best sources.
- Categorising the liquidity of a fund’s underlying assets and the liquidity of the fund's own shares.
- Deciding how to obtain and retain data on historical performance and subscription and redemption activity (for the historical risk section).
- Ensuring the availability of conditional data for each relevant fund type: leverage and sources of borrowing, dominant influence and controlled structures.
When all of the reporting decisions have been made it's time to review the process: to ensure that decisions made about data classification and calculations stand up to rigorous testing; and finally, to run dummy Annex IV Reports with live data. These dummy reports should be run in time to ensure that the filing deadlines for the first reporting period can be met, including a dummy submission onto the Central Bank’s ONR portal.
What will Annex IV Reporting reveal?
Very little will be revealed for registered AIFMs, as the scope of Annex IV Reports for registered AIFMs covers only the main instruments in which the AIFM is trading; the markets in which it is a member or where it actively trades; and the diversification of AIF portfolios managed by the AIFM.
While for authorised AIFMs, the Annex IV Reports will provide regulators across the EU with a vast quantity of standardised data, all with the objective of enabling them to monitor and manage systemic risk. It's not yet clear how they will do this because AIFMs are entirely focused on meeting filing deadlines; and regulators are focused on offering guidance on the content and timing of reports, so the regulators haven't given any indications about what they're most interested in and how the information contained in the Annex IV Reports will be used.
We can only theorise that regulators will have to use the information gathered to frame new themes of research and new regulation on a macro level, and AIFM or AIF inspections at a micro level. A failure by regulators to use all of the Annex IV data seems incompatible with the objective of monitoring systemic risk, which was one of the main drivers behind the Alternative Investment Fund Managers Directive (Directive 2011/61/EU).
The production of any new reporting is often about presenting information, which is already available, in new ways. New presentation often puts the management of certain points under a new spotlight, which may precipitate new decisions about the management of a fund. A few examples follow below:
- Analysis of ESMA classifications together with the main portfolio concentrations included as part of AIF file 24(1) H of the AIFM Reporting Templates might show that a fund’s principle investments have moved away from what is disclosed in its prospectus as its main investment policy or strategy. In such cases a fund ought to look at updating its prospectus.
- AIF file 24(2) C of the AIFM Reporting Templates requires funds to set very clearly their redemption frequency, classify the liquidity of underlying assets and investor equity into time bands as well as detail the redemption settlement period and detail liquidity management techniques available (gates, suspensions, side pockets etc.).
All of these items, taken together should help funds to see whether they can objectively assert that their liquidity cash management and investment policies are aligned as required by Article 16(1) of AIFMD.
- AIF file 24(2) C of the AIFM Reporting Templates also requires funds to set out their derivative exposures using prescribed metrics. Funds should be able, using these metrics to stress test, in accordance with Article 15(1) of AIFMD, their actual exposures to derivatives and derivative counterparties, using the results to determine whether the fund’s appetite for risk is as described in the fund’s prospectus and/or the AIF Rulebook.
- It may be possible for an AIFM to identify trends across all funds under management, for example the portfolio breakdowns included in AIF file 24(1) H and AIF file 24(2) A, combined with the borrowing and leverage information included in AIF file 24(2) C and AIF file 24(4) might give an indication of the AIFM’s overall view of particular markets as it is possible to extrapolate which assets are leveraged and which are not.
- AIFMs using IT based solutions should be able to identify trends in relation to a number of the Annex IV Reporting fields e.g. AIF file 24(2) C will show from report-to-report the evolution of the liquidity of the asset classes in which they invest.
There are probably many other useful indications as to a fund’s ‘health’ that can be gleaned from the Annex IV Reports. It is precisely because the Annex IV Reports seem to be the best available 'thermometer' for funds that we can see circumstances, particularly those involving large investment into less liquid asset classes, where investors will request disclosure of Annex IV Reports before they invest in a fund.
Once AIFMs get past their first Annex IV Report, they would do well to try to review their Annex IV Reports from the point of view of a regulator. Doing so would help them to consider whether there was any discrepancy between disclosures in their fund documents and implementation as set out in their programmes of activity.
Where there are discrepancies the next step would be to consider whether the issue is temporary or, if not, whether they ought to revise their disclosure (what they say they do) or their implementation (what they do) in order to bring about a ‘clean bill of health’ Annex IV Report for the next reporting period.