It’s fair to say that under AIFMD UBS Fund Services has got all bases covered. Not only has the firm developed a depositary solution to support both EU-based and non-EU based funds under Article 21 and Article 36 of the directive, it also has a management company platform that can allow it to act as a third party AIFM (after 22th of July) as well as the ability to act as the Swiss legal representative to managers wishing to continue marketing their AIFs into Switzerland.
It’s a comprehensive offering that few can rival.
Depositary solution – an open architecture approach
Under AIFMD two Depositary models exist: Full Depositary as known from the traditional funds world under Article 21 of the directive, which applies to EEA managers running EEA funds on one hand and Depositary lite under Article 36 of the directive, which applies to non-EEA funds. Therefore, this March, UBS Fund Services launched its Depositary Lite platform to help managers of offshore funds fulfill the requirements of AIFMD.. Under this model, UBS will conduct the cash flow monitoring, safekeeping and general oversight requirements but unlike the full onshore depositary model–– it will not have strict liability for the fund’s assets.
National private placement rules are changing in EU member states. Some countries like Germany are gold plating the directive, meaning that even non-EEA managers continuing with private placement may require a depositary.
“Our clients are looking at key countries and that’s why UBS Fund Services has rolled out its Depositary Lite solution,” says Monette Windsor, Head of UBS Fund Services, Cayman Islands.
David Rochford, head of regulatory product development at UBS Fund Services, adds: “Our platform can be deployed as part of a split service model working alongside other providers, or as a one-stop shop solution. It’s not a one-size fits all solution. Depending on what each manager does in the EU, how many markets and investors they have, we want to ensure we can offer a full AIFMD solution so that different parts of it will be available to managers; Depositary Lite solutions for managers who continue with private placement, and management company solutions for managers who wish to become fully compliant.”
London-based managers running non-EEA funds for example are busy scrambling to appoint their Depositary Lite provider ahead of the transposition deadline on 22 July 2014. Those clients can at any time appoint UBS to carry out the three core functions in full, or take a more à la carte approach by using their existing administrator and prime broker(s) and appoint UBS purely to perform the oversight function; this flexibility is being supported by the FCA in the UK.
The full depositary model is available to EEA managers running EEA funds who are required to comply with all facets of the directive. With this UBS provides a future proof solution. By 2018, ESMA will require all managers, including third country managers, to have AIFMD-compliant funds. Depositary Lite, whilst important, may be a short-term model.
If the private placement regime is abolished in 2018, all managers (of onshore or offshore products) will require a depositary.
UBS Fund Services has developed an open architecture model to support AIFMs under the full depositary regime. This will allow the manager to continue with their existing prime brokerage relationships, provided of course the prime brokers are supported on the UBS platform.
“We can facilitate an open architecture platform for prime brokerage appointments. This gives clients the flexibility to appoint the prime brokerage counterparts they need to work with which will add significant value to their business and that of their shareholders,” says Gavin Byrnes, Head of Business Development UK, UBS Fund Services.
The open architecture approach is considered by UBS to be a more cost-effective framework to implement. UBS will work with a manager’s preferred prime broker(s) in order to implement a legal and operational framework commensurate with the framework it has in place in the UBS investment bank division.
“This framework is in line with other open architecture frameworks with respect to discharge of liability (to the prime broker under a sub-custodial agreement). Where that is not possible we will have an indemnification model in place with the relevant prime broker."
“We therefore don’t envisage that this model is going to be as costly as some of the headlines have predicted over the last 18 months. We think the costs are going to be negligible relative to the pre-AIFMD framework that has been in place in Ireland for Irish QIAIFs,” adds Byrnes.
Provided the discharge of liability is acceptable to the AIFM, the depositary and the prime broker and the necessary disclosures are made, Byrnes sees this open architecture model as the one most likely to be adopted by the industry.
With respect to strict liability, some depositaries are driving their clients towards a vertically integrated model with their own prime broker providing the necessary financing while others appreciate that an open architecture approach is required to ensure costs are minimised and managers can diversify counterparty risk.
Services such as financing, risk reporting and other prime brokerage-orientated ancillary services form the basis of this objective reasoning as without them it is difficult, if not impossible, for a hedge fund manager to operate. Separating the assets from the prime broker with depositaries will only further exacerbate the issue and contribute to increased operational cost, technology and integration difficulties as well as increased financing costs according to Byrnes.
“We are confident that an open architecture model is the most sensible approach and one that will ensure the ability of our clients to manage money while ensuring that costs are in some way mitigated for shareholders,” adds Byrnes.
Third-party AIFM solution
As well as providing both, offshore and onshore depositary services, UBS Fund Services has moved quickly to establish an AIFMD fund platform, which is planned to go live beginning 2015. The platform will be domiciled in Dublin and will act as the AIFM for non-EEA managers (as well as act as the external management company for EEA managers who have already launched funds) in a similar fashion to how it supports UCITS funds.
“Our AIFMD solution will be an infrastructure platform with distribution support but it absolutely won’t be an active distribution model; that’s a key differentiator. We will act as the administrator and custodian to the AIF but it will be an open architecture solution from a trading counterparty perspective,” confirms Byrnes, adding:
“We will handle all the heavy lifting from a valuation, administration, collateral management, regulatory reporting and risk management perspective. The only thing that will be delegated to the manager is the portfolio management activity.”
UBS Fund Services today already operates various fund platforms in Dublin under the UCITS and QIAIF frameworks and as you would expect of a global organization, over the years it has built out a comprehensive framework of policies and procedures to meet the complexities of all strategies supported on such platforms. Being able to offer that same level of support to non-EU managers wishing to establish EU-based AIFs makes logical sense.
“We have a platform that we are able to scale and the genesis (of the AIFMD solution) was to leverage this capacity and support clients to focus on the distribution aspect of their business; the two went hand in hand,” says Byrnes.
UBS Fund Services will offer managers passive distribution support giving them access to the largest distribution network in Europe.
Swiss legal representation
As if that weren’t enough, UBS will also support managers wishing to distribute their AIFs into Switzerland (and vice-versa) under the AIFMD passport with the establishment of representative services. This will allow UBS Fund Services to act as the Swiss legal representative for funds marketed both to qualified and non-qualified investors. Due to the complementary nature of this service UBS has decided to offer representative services only along with other AIFMD services or to managers using UBS as a custodian, administrator prime broker or distributor.
What UBS Fund Services is keen to ensure is that accessing the Swiss funds market remains as easy as possible for its clients. Aside from helping with the fund registration process with the Swiss Financial Markets Authority FINMA if required, UBS will support managers with all the legal, compliance and tax reporting requirements.
“For AIFs distributed to qualified investors only a representative needs to respond in a timely and professional manner to any sort of inquiries – e.g. to provide the most recent legal fund documents, such as the prospectus, to investors. Furthermore, a representative is responsible that all distribution activities are in compliance with the applicable law and the relevant guidelines of the Swiss Funds and Asset Management Association (SFAMA),” explains Yves Schepperle, Head of Product Development and Representative Services, adding that “fund managers must be comfortable with their chosen representative because they may be contacted by investors and/or FINMA.
“As the name of the representative and paying agent will have to appear on any factsheet or presentation and on all legal documents used for Swiss investors, a fund manager should choose a well-known and trusted brand in Switzerland,” states Schepperle.
Whether its depositary services, management company services, or Swiss legal representation, UBS Fund Services has built a one-stop shop for managers wishing to operate in complete confidence under AIFMD.