Paris-based agency ESMA defines technical standards for harmonising the interpretation of European legislation including AIFMD and UCITS, but there are plenty of no-go areas for ESMA. The Hedge Fund Journal interviewed ESMA’s investment management team leader, Richard Stobo, to clarify the scope of ESMA’s remit, its views on UCITS hedge funds, ’40 Act funds, fund marketing, imminent AIFMD reporting and Open Protocol.

Regulatory uncertainty discourages some hedge fund managers we talk to from launching a UCITS fund. ESMA’s response is that “UCITS is a stable regulatory framework dating back to 1985, and ESMA does not want to create short to medium-term uncertainty.” ESMA says its new criteria for eligible indices were motivated by disparate interpretations and investor protection concerns. The latter also inspired its collateral diversification rules, where initial proposals for a 20% diversification cap were modified in light of industry feedback that the limit was too tight.
 
Some hedge funds now have both UCITS and ’40 Act feeders for the same strategy, and overlap between the two sets of rules could, in theory, support a fast tracking reciprocal approvals process. ESMA admit that they have not carried out a detailed comparison of the two frameworks “but think that UCITS may be more detailed and prescriptive on eligibility and exposure issues.” ESMA also points out that mutual recognition is a matter for national regulators – as are, of course, the National Private Placement Regimes (NPPRs), so ESMA has no view or purview over certain regulators “gold plating” their regimes. Reverse solicitation regimes are not even covered by AIFMD, so again ESMA is impotent to harmonise them.

Hopes for globally harmonised regulatory reporting were manifested in the Open Protocol submission to ESMA, and Stobo says that this was “seriously considered by ESMA, with some merit seen in the idea of using existing standards.” But ESMA perceived Albourne to be representing hedge funds whereas AIFMD also covers other alternative investment funds including private equity and real estate. Additionally ESMA argues that the AIFMD regulations are too specific to be fully compatible with Open Protocol. Similar concerns apply to dovetailing AIFMD reporting with Form PF or Form CPO-PQR. Stobo admits that they all have similar aims in measuring leverage and exposure, but says that the US reporting standards are “based on a different set of legislative requirements with substantive differences in the details.”

We may ask who the end users for all this data are. ESMA says that national regulators, ESMA and the European Systemic Risk Board will share the data and ESMA is currently developing an IT system to consolidate it from a systemic risk perspective. In a globally interconnected world, can regulators outside the EU also exchange data with EU ones? Apparently AIFMD does not foresee that. Stobo stresses that any external disclosures would “respect the sensitivity and anonymity of the information” and ESMA is still exploring the possibilities of making anonymised, aggregated information available to investors, along the lines of the long-running FCA hedge fund survey.