EY Compliance Management For Asset Management Survey 2012

Compliance management
for asset management

2012 survey
Introduction 1
Executive summary 4
Top dozen action list to achieve better compliance management 6
Survey fndings 13
Summary of fndings 2012 survey vs. 2011 survey 40
Glossary of acronyms 43
Contents
1 Compliance management for asset management 2012 survey
Introduction
It is clear that for asset managers and their asset servicing partners, the next few months
will bring opportunities for some and threats for others as the new regulatory mind-set
turns to prescription, intervention and reverse burden of proof. Indeed, the background
narrative in the global asset management industry over the next fve years will be how to
deliver attractive returns that are proportionate to the varying risk appetites of clients
while continuing to innovate, manage market complexity and scale their businesses in a
multi-regulated global context.
For example, respondents in this survey indicated how investor demand was changing
signifcantly and asset management companies were demonstrating a need to innovate
at a far greater pace than ever before in order to escape the transparency trap
escalating regulatory burden and cost coupled with lackluster alpha and correlation risk
for investors. European asset managers reported that they remained under pressure
from some clients demanding solutions rather than products, insisting on changes to
mandates, switching to alternative investments while pushing for lower fees, or pulling
out of investments altogether in a fight to safety.
Regulation was proving to be a key catalyst in this context, creating the conditions for
business uncertainty for some asset managers. Some were concerned about how to shift
asset allocation decisions, either to generate alpha in a risk-averse investment climate
offering increasingly lower yields and greater transparency or to remain abreast of
decumulation pressures. Given the drive toward institutionalized business, frms were
looking for innovative ways to provide the returns needed without incurring excessive
correlation risks with other assets.
There was widespread evidence of the quest to innovate while they attempt to operate
within the regulatory context and de-risk their portfolios at the same time. Firms
indicated that they were more familiar with employing OTC-traded derivatives as a more
mainstream element within portfolios, either within guaranteed/absolute returntype
investing as a function of collateral management or as a key component of hedging
strategies.
Several frms on the active side indicated a desire to explore new sectors buying into
distressed debt, global tactical asset allocation (GTAA, which is trading between markets
to generate absolute returns), a next generation level of interest behind liability-driven
investing (LDI), portable alpha, and a greater level of interest in the burgeoning active
exchange-traded fund (ETF) sector all featured.
On the passive side, the survey picked up on regulation concerns as some frms targeted
more cost-competitive forms of passive market exposure, such as fully replicated or
hybrid ETFs and indexing, as more end investors demonstrated their desire to seek
exposures commensurate with their risk appetites. Some frms in the survey were
exploring smart beta strategies using alternative beta indices, through which
investors to target specifc investment objectives, rather than trying to track specifc
fxed income or equity benchmarks.
Finally, some frms were keen to understand the regulatory and country risk implications
as they expressed a growing appetite behind investing in alternative sectors, either by
investing in nontraditional asset classes such as infrastructure funds, custom real estate
funds or farmland funds, or by investing in regulated commodity funds or managed
futures. The attraction of investing in these real economy approaches is to enable
investors to beneft from income streams matched to their liabilities, with built-in hedges
against volatility in stressed markets (tail risks) or against undue levels of infation.
The 2012 Regulatory Compliance
Survey the fourth in the series
has been issued just over fve years
since the frst tremors that triggered
the global fnancial crisis of 2008.
Its publication takes place amid
continued macroeconomic structural
uncertainty spanning Europe, North
America, Asia-Pacifc and the BRIC
countries, coupled with a signifcant
escalation in the intensity and
intended effects of global, regional
and local regulations. On the face of it,
greater regulation equates to greater
levels of transparency and disclosure
however, this time around, asset
managers were divided as to whether
the benefts of regulation would
accrue to them or to their end clients.
Although most frms were interested in how to innovate, only a
minority of respondents felt confdent enough to state that they
could actually see concrete opportunities to innovate as a direct
result of forthcoming regulations. For example, measures such
as RDR and some of the UCITS IV-VI measures (featuring fund
mergers, master-feeder funds and passports for management
companies) offered possibilities for frms (or their parents) to offer
new investment products, offer new platforms or gain effciencies.
Other new regulations, such as Solvency II, AIFMD, MAD II/
MiFID II, FATCA legislation and EMIR, required more substantial
reporting obligations and record-keeping. The desire to hold a
buffer of quality collateral for frms suddenly needing to clear OTC
derivatives added a further complicating factor in the case of the
latter.
Furthermore, macro-regulatory measures such as the detailed
rule-making from Dodd-Frank, Basel III/CRD and Solvency II
remained fuid and incomplete at the time of writing, with the
potential to delay much-needed reform in adjacent or dependent
regulations, sometimes considerably. The G20 Summits
1
had
promised reform of the fnancial services industry by a target date
of December 2012, but as the fnish date loomed, it was only too
apparent that there was some way to go in terms of central banks
and competent authorities implementing the devil in the detail in
a consistent manner.
The result of the processes among the G20 countries has created
an asset management industry confronted by a fotsam of
piecemeal regulatory initiatives taking place at global, regional
and local levels. Political interventions have created measures that
sometimes appear to work at cross-purposes (e.g., EMIR/AIFMD
vs. shadow banking/CRD on collateral/rehypothecation). The lack
of congruence in some key areas such as banking and capital
markets represents an 11th hour warning of the multi-locational
free-for-all to come if divergent approaches or extraterritorial
tendencies fail to be reconciled.
It is little wonder then that we found that compliance professionals
in asset management show signs of reg fatigue, because they
are stretched as never before by the number of new measures
and constant changes. Many seem challenged to help business
and operations colleagues understand the impacts, deduce the
opportunities and manage the complexity transfers from the many
and varied measures, while trying to support their risk colleagues
in anticipating extreme events, optimizing capital and liquidity,
and minimizing the potential for reputational risk.
1 The G20 Summits that had taken place in London and Pittsburgh in April and September 2009 had proposed 58 action
areas for promoting global fnancial regulatory reform in the wake of the crisis. Impressive progress was made on the
part of the IMF, the OECD and the FSB, working with bodies such as the BCBS, BIS, IAIS, IASB and IOSCO to ensure that
all G20 countries endeavored to implement the prudential or conduct of business measures into their national regulatory
frameworks by the target completion date of December 2012.
In such an environment, we believe that careful thought about
future developments and possible improvements to business
and operational processes and the compliance management
function in particular should be extremely valuable for the asset
management sector. In conducting this survey, we interviewed
42 Heads of Compliance, Heads of Legal and Chief Compliance/
Risk Offcers representing a selection of large, medium and small
traditional and alternative investment management frms (by
AuM) operating across Europe.
One-on-one interviews conducted between July and
September 2012 gave respondents the scope to offer full opinions
once more under conditions of anonymity. We are grateful to
them for their patience and considerable support behind this
endeavor. Once again, the result is a range of qualitative opinion
and quantitative comparison fndings that form the bulk of this
publication. Critical conclusions are featured in the executive
summary and in the 2012 vs. 2011 comparison template at the
rear of the document for ready reference by seniors, particularly
from the boards or the business.
Ernst & Young has also added our own view of the top dozen
actions that we believe will help frms to improve their compliance
management processes still further. This survey complements the
latest Risk Management for Asset Management Survey that was
published in June 2012.
We hope that you and your colleagues in legal, risk, internal audit,
fnance, business, operations, senior management and the board
enjoy reading this report and that you fnd it constructive and
thought-provoking in helping your frm raise its game, mitigate
risks and attract new business. We also welcome your comments
and feedback. If you would like to discuss any aspect of the
survey, please get in touch with me and my colleagues using the
contact details at the back of the report.
3 Compliance Management for Asset Management 2012 Survey
Compliance Management for Asset Management Survey
Ernst & Youngs Compliance Management for Asset Management 2012
Survey offers revealing insight into the unique set of challenges currently
confronting our industrys compliance professionals. In comparing the
views of 42 Heads of Compliance, Heads of Legal and Chief Compliance/
Risk Offcers from some of the most recognized asset managers in Europe,
the survey provides indications about future developments and evidence of
the importance of the compliance function in the industry. It also suggests
areas where improvements must be made to effectively meet the new
challenges faced by asset management frms.
4
A focus on governance, remuneration and innovation is making compliance
management an essential profession in 2012.
The European asset management industry has come of age since the risk and
compliance surveys were frst launched in 2009. The drivers managing complexities
from overlapping directives plus the desire to mitigate reputational impacts havent
changed, but the prioritizations have shifted to involve risk management and operational
aspects as magnifers. Examples of the former include investment risk independence
and product, liquidity and fduciary risk management, and examples of the latter include
front offce controls, managing the complexities around collateral rules, and client asset/
money protections.
Just as the lines blurred between fnance and compliance when managing the ICAAP
processes, the lines between compliance and operations have blurred with measures
such as EMIR and Solvency II on the horizon. Heads of compliance discovered how
aligning regulatory impact with business innovation was a stepping stone to cultural
acceptance on the part of senior management. Some frms cited opportunities to develop
new instruments, share classes, management structures, risk models or even platforms
on the back of regulations examples included LDI, GTAA, portable alpha, smart beta,
active ETFs and infrastructure assets. The leaders were not shying away from the
consequences of taking bold initiatives.
There are over 30 local and regional regulatory measures
impacting asset managers in the EU; regulatory measures are
becoming more operational, impacting trading, collateral and
outsourcing arrangements.
Gone are the days when asset management was a lightly regulated industry. The
G20 deadline of 31 December 2012 coincides with over 30 local and regional
compliance measures that need to be anticipated, understood, modeled and managed.
With high-profle fnes issued for areas such as client money arrangements or mis-selling,
the consequences of the potential impacts of getting it wrong can have a severe impact
on redemptions and thus AuM, as sadly witnessed by more than one respondent in this
survey. While the amount of attention paid to ARROW and ICAAP procedures has shown
a quantum leap, there is evidence to show that frms need to show similar willingness to
address the conduct side in a similar manner. The pace has stepped up in four themed
areas when it comes to conduct regulation. Firms will need to demonstrate (via reverse
burden of proof) that they have the policies/procedures, systems/controls, reporting
tools and quality data to meet the needs in each zone:
Product regulation Covering PRIPs, RDR and local product defnition/qualifcation/
intervention approaches in each country of business
Front offce measures Short Selling Regulation (SSR); revisions to the Market Abuse
and Markets in Financial Instruments Directives (MAD II/MiFID II); and local front-
offce-themed approaches in each country
Fund regulatory measures Including UCITS V & VI following on from UCITS IV, the
Alternative Investment Fund Managers Directive (AIFMD) and local approaches on
monitoring the component parts of these measures in each country
Derivative and collateral measures Dodd-Frank Title VII and EMIR as well as newer
regulatory resolutions, such as shadow banking and ETF/MMF measures as required
Executive summary
The opportunity to build trust and
confdence is the key beneft coming
out of the regulatory attention
that our industry is getting. We are
reverting to a frm that is true to its
values, running our agency business
model with transparency on fees
[particularly our tax transparent
funds] and a focus on both client
service and avoiding regulatory risk.
We have a regulatory reform presence
and a technical compliance team
which features six to seven FTEs
working on policies/procedures,
marketing signoffs and business
guidance as part of our reform
remit. You cant look at regulations in
isolation we focus on CRD, MiFID II,
UCITS V and AIFMD simultaneously.
There are two philosophies at
work you can either take steps
by preventing conficts of interest
developing with the business from
arising, or manage those conficts
when they do. In the real world
of frms with an active style of
management, the former is not
realistic or practical, so we invest in
systems to manage appropriately.
Compliance management for asset management 2012 survey
The compliance function has moved beyond its former image of ex-
post box-ticking toward ex-ante horizon risk management, helping
frms avoid the reputational effects.
As regulation becomes more comprehensive, consistent, invasive and potentially even
activist, the best recourse would be for frms to demonstrate ftness for purpose by way
of skill-sets, future fexibility when it comes to systems design, and above all, reinforced
evidence of good intent in serving their clients. Sound management information, coupled
with sound behaviors, will be an important means to sustain business models. There
is normally a trade-off given the level of compliance resourcing. As more attention
is diverted to administering governance, responding to requests for information
by regulators and facing up to clients, the traditional functions of policy work and
compliance monitoring are getting squeezed.
For the frst time, the survey recorded how regulators had started posing deeper
questions about skill-sets and bench strength to cover all the countries where a frm
did business. Firms would do well to agree to a modus operandi of where critical
functions should reside such as compliance monitoring, guideline monitoring, branch
monitoring, client onboarding/KYC, AML/sanctions, special investigations, whistle-
blowing, marketing, product development, regulatory reform and lobbying. Firms should
also redesign their systems to cope with single-portfolio view or single-legal entity
look-through requests. Almost all would beneft from exploring the means to transfer
complexity by working in partnership with asset servicers to examine the case for
managed middle as well as back offce requests.
Engaging with Heads of Compliance and Regulatory Reform, who are working
hard to create a holistic approach to compliance, was the primary rationale
for running this survey.
There are big opportunities to be had
from regulation examples include
running LDI strategies from our QIF
structures, running ETFs from Dublin
and Paris, and Solvency II duration
matching products. Our parent is also
planning to run platforms, new vendor
services and potentially even trade
venues.
ABC and AML is a huge area of
thematic interest for the FSA right
now. Apart from client money, weve
had to redouble our efforts around
ABC, fnancial crime, fraud and AML.
Weve also formed a GIFA (group
investing forensic accounting) team
who are tasked with overseeing this
activity.
Compliance offcers need to
understand the products to be fully
accepted by the business. Many
compliance offcers look as if theyve
just graduated from compliance
school as business prevention offcers.
They can quote you the rule from the
regulation but they havent a clue
about the implications for the business
and cant keep a calm head in a storm.
Weve spent a lot of effort in setting
the right tone from the top in terms
of positioning ourselves most
appropriately given that we are a
poster child for what happens in this
sector.
Based on the results of the survey and the experience of our
own Ernst & Young practice professionals, we have identifed
the top dozen actions to help frms better manage the risks
they face. This list is not a defnitive action plan, but we hope
it will offer a useful starting point for identifying the steps that
would most beneft your frm.
6 Compliance management for asset management 2012 survey 6
Top dozen action list to achieve better
compliance management
1
Task a regulatory reform function/PMO to anticipate
future measures, lobbying, strategy, business development
and product development
Three years ago, when compliance managers in asset management focused
on one signifcant regulatory change per year, the notion of a regulatory
reform function was rare. Now, as frms are confronted with incremental
regulatory changes each month, it is vital, and 45% of respondents in this
survey indicated that the frm had either tasked a global regulatory reform
(GRR) function/individual or could rely on a comparable function at the
parent level to help manage the risks on the horizon. Asset managers
should evaluate the likely future costs of trying to dig up the road
regulation by regulation on an ongoing basis. They should try to determine
how future opportunity costs from meeting requests from local/regional
regulators and from signifcant clients such as pension funds/SWFs could
be managed down. A minority of frms have begun to design their systems
and controls (SYSC), their reporting or their data structures to meet the
needs of multiple regulations, or by transferring complexities to third-party
servicing companies (reversibly, if that is possible). Fewer than 5% of the
leading frms have tasked a project management offce (PMO) function to
do this but interest is growing!
2
Where a majority of respondents see adverse impacts, a
minority see opportunities to be developed
Heads of Compliance discovered how aligning regulatory impact with
business innovation was a stepping-stone to cultural acceptance on the
part of senior management. Virtually all respondents grumbled about the
impacts of some of the measures remuneration at the fund level, liability,
treatment of letter boxes, uncertainties over inducements and extra-
territoriality all drew sharp criticism. But some frms cited opportunities
to develop new instruments, share classes, management structures, risk
models or even platforms on the back of regulations such as UCITS IV,
RDR/PRIPs and MiFID II, which could be regarded as more opportunistic.
Seventy-six percent of respondents claimed to be exploring/designing new
products or services in order to take advantage of the regulatory measures
examples included LDI, GTAA, building block QIFs, portable alpha,
alternative beta, active ETFs and infrastructure assets such as farmland.
One extremely effective strategy practice by several frms in Scotland, the
Netherlands and Scandinavia was to build greater levels of trust by focusing
on ethics and/or repositioning their reputational profles.
There is defnitely a fight to quality
in the Eurozone and its driven not
so much by regulation but by politics
and macroeconomics. And yes, these
trends could become structural.
Regulatory risk is the big issue the
worlds of UCITS, AIFMD, MiFID II,
EMIR and FATCA especially plus
the increased interest from local
regulators. We have a great deal of
interest shown from the DNB and
AFM here in the Netherlands, the
CSSF have doubled their headcount
in Luxembourg, and in France, the
Madoff issue means that the AMF are
much stricter on monitoring.
We are moving to take advantage of
new opportunities by creating new JV-
arrangements for RDR.
The biggest opportunities for our
frm right now are central clearing
opportunities, offering greater ranges
of ETFs and the launch of more RDR
share classes.
3
Smoother ARROW visits show that good frms get more
time off for good behaviors
The FSAs ARROW visits are often electrifying. But compliance departments
and other control functions have spent time reacquainting their business
colleagues with the fner points about their frms policies and procedures.
The evidence from this survey suggested that regulators right across
Europe were placing a great deal of focus on behaviors and managing
conficts of interest in the Nordics, for example, there was renewed focus
on TCF, and in Germany, on Musterbaustein Kostenregelung for portfolio
management. In the UK, there was growing interest in frms setting out
their compliance strategy and ensuring that it was fully embedded (the
USE test). Respondents were keen to share their experiences around
culture, behaviors and ethics. Several frms were able to demonstrate how
their code of ethics linked to their risk appetite, TCF outcomes, periodic
disclosures and reinforcement by means of training, acceptable case
practices and sometimes mentoring. Leading frms explained how these
measures could extend beyond the frm to include branches, outsourcing
agents, key clients or shareholders.
4
Capital might still be king, but evidencing good governance,
controls and behaviors is equally important
The positive news for frms in this survey was that four asset managers
were awarded lower ICG scores by the FSA. In effect these frms made
careful preparations to manage their capital requirements downwards
per Pillars 1 and 2 and the treatment of cost/time and commerciality of
unwind. The natural momentum of travel might still be an upward trend
in ICG scores (to a range of 130% to 170%), but clearly, some frms have
worked hard to buck that trend. Asset managers should continue to
model their capital requirements with a goal of optimization in mind and
conduct capability maturity modeling exercises on what other frms are
doing as part of their ICAAP/SREP processes, bearing in mind the type
and combination of factors that might give the regulator cause for setting
elevated ICG uplifts. This applies particularly to frms running platforms,
frms operating multiple or complex investment styles featuring leverage,
or frms expecting to take full advantage of waivers. Firms are strongly
encouraged to focus on corporate governance, unwinding provisions,
reverse stress testing (killer super-scenarios), and especially the USE
test (linking risk qualitative and quantitative risk appetite statements and
frameworks to strategy and behaviors).
The expectations around CoB have
moved the fundamental challenge
is supplying the regulator with an
open-ended reverse burden of proof.
Cultural drivers now span discussing
a mission statement, a statement of
corporate values and a code of ethics
and may even extend to performing a
root cause analysis tied to culture and
values in 2013. The regulator wants
to know how a CoEs values might be
consistently applied so as to prevent
poor customer outcomes.
The changes to the CASS rules/
CASS-RP are the biggest worry
because of the need to address all the
agreements. We have an ARROW visit
in October and a need to evidence lack
of conficts around our outsourcing
arrangements with XXX and YYY.
We have a standard remuneration
agreement with our outsourcers
but we think the FSA will wish to see
something more robust.
Solvency II will impact asset allocation
movements as frms replace their
exposure in equities with assets in the
passive space such as index funds,
ETFs and alternative beta, all of which
are relatively easy to handle from a
transparency perspective.
Top dozen action list to achieve
better compliance management
We invest in ETCs and ETNs ourselves
but we are very aware of the mis-
selling potential of ETFs and the risk of
a bubble developing, particularly in the
commodities space.
Theres a big focus on the front offce
right now focus on PM visits, focus
on automated TCA, and ensuring
adequate segregation of dealing
and fund management. We are also
engaged on managing market abuse
and weve run an internal development
to drive our diagnostics using
Bloomberg as a platform.
We used an external provider for
getting our KIIDs up to speed and
didnt experience anything like the
same degree of issues that we did for
the registration Form PF.
Master/feeder could be one
opportunity but only the future will tell;
there is the advantage of a passport
but there are costs to apply to funds.
5
Product management is no longer just Know Your Client
its also Know Your Product (KYC, KYP)
The current climate is a hot one for product development, promotion
and investor protection. Recent mis-selling scandals, fnes, product
demarcations into simple vs. complex and the promise of greater
product activism next year (around intervention and suitability) make this
one of the hardest areas for asset managers to manage. More than one
respondent noted the divergent approaches being adopted across Europe
color-coding in Portugal; prescriptive regulation in France and Belgium;
SRRI approaches in Luxembourg and Denmark; product intervention in
France, Italy, Spain and the UK; a focus on inducements/kickbacks in the
Netherlands, UK and Germany; TCF approaches in the UK, Ireland and the
Nordics; and prescriptive approaches to distribution in the UK, Italy and
Greece. Firms must design their product manufacturing and distribution
capabilities to focus on multiple outcomes. Client onboarding/KYC must
be combined with Know Your Product (KYP) and applied as a product
in every case. Particular areas for focus regarding the latter elements
included frms offering guaranteed return products and absolute return
products, so frms should ensure that they are confdent of evidencing the
correct classifcation of products, clients and processes if they offer these
products.
6
Control frameworks must withstand the heat of the
front offce
The next two years will see a signifcant focus being placed on front
offce environments across several EU Member States such as the UK,
Germany and France. Many frms will need to retool their front offce
control frameworks, their OMSs/PMSs and their policies accordingly. Firms
featuring shorting as part of their investment or hedging strategies will
need to be ready to respond to requests from regulators for information
concerning shorting activities in cash or derivative instruments at relatively
short notice, with the prevailing model increasingly that of a reverse
burden of proof (Spain) or even proving a negative (Italy). Measuring and
monitoring conficts will be a central theme for frms wishing to satisfy
new market abuse measures, including whether this relates to sanction
checking, monitoring company visits by fund managers, sounding out, soft
commissions, segregation of fund managers from dealers, demonstrating
fairness monitoring on order aggregation or allocations, or demonstrating
why an adverse situation or confict could not develop if a frm operates
algorithms, as well as the more traditional areas. Firms should also press
their sell-side dealers to co-model the potential impacts on liquidity,
collateral and market microstructure for non-equities under MiFID II.
7
UCITS V/VI a big step up from UCITS IV
Most respondents understandably didnt wish to dwell on their experiences
under UCITS IV, preferring to focus on the concerns and opportunities
under UCITS V/VI. But frms might wish to refect on whether the KIID/
SRRI program was delivered to planned timescales, and whether they
had implemented a mechanism for gaining assurance over the probity of
production, life cycle management and effective translation into all client
languages. Firms might also wish to revisit whether full use was made of
opportunities of ManCo passporting, cross-border mergers or master/
feeder structures over the next three years, and if not, why not, while
assessing the merits of any benefts that were realized. As for UCITS V, it
is logical that frms conduct their impact analyses with AIFMD and ideally
MiFID II in mind, particularly when it comes to aligning remuneration
policies or applying these at the appropriate levels. Given the depository
liability measures, frms might consider the terms of their service provider
provisions and initiate a review of any performance fee calculations to
ensure that they are compliant.
8
On AIFMD, frms cant afford to wait for the draft
measures to be fnalized
There is growing acceptance that AIFMD wont merely be game-changing
for hedge funds but will likely have direct and indirect impacts on
traditional frms managing real estate, infrastructure funds or investment
trusts too. There is little that frms can do to soften the impacts, although
one or two advocates forecast that the AIFM brand could become just
as accepted as a strong quality brand as UCITS for marketing purposes.
Firms should model the impacts on ManCo letter-box entities to evaluate
the potential impact if a proportionality threshold is applied consistently by
every Member State. Firms should also look at their legal entity structures
to evaluate where they would need to operate AIFM activities (if they
operate MiFID branches, this should be a top priority as it is understood
that frms cannot maintain both AIFM and MiFID branch activities). Asset
managers should press both the global custodians and prime brokers
on how they would address liabilities arising from loss of assets through
fraud or insolvency, and they should press for an audit of how client assets
would be ringfenced at the sub-custody network level at each investment
destination under stressed or extreme market conditions.
We are delaying investments in P/E in
view of the unforeseen consequences
under AIFMD.
AIFMD is the largest impact because
it impacts our investment trust model.
The letter-box provision in the draft
leaked L2 text is particularly unhelpful.
We will be looking to extend the broad
coverage of our OEICs and NURS
funds model by taking in investment
trusts into our external manager
model and we will look to convert our
UCITS manager into a AIFM, and keep
our MiFID activity separate.
We established an inter-dealing
entity as an AIFM and are fnding the
prospect of applying remuneration
measures at a fund level to be most
intrusive.
Top dozen action list to achieve better
compliance management
9
On Dodd-Frank and EMIR, the devil will be in the details
each side of, and across, the pond
Both the Dodd-Frank Title VII and EMIR measures are due to take effect at
the end of Q4 2012, but some of the devil in the detail might be applied
over the forthcoming months, including measures such as substituted
compliance and extraterritoriality that are applicable to US persons.
The Dodd-Frank measures that apply to swap dealers/major swap
participants for swap reporting and record-keeping are understood to
take effect from October 2012 for IRS/CDS and January 2013 for EQS/
XCS. In Europe, ESMA will post the products eligible for CCP clearing
from January 2013, with reporting measures issued after Q3 2013, the
margin requirements fnalized later. (We advise you to check those dates,
which may have changed since this was written.) Asset managers should
begin to adapt their business models for signifcant change accordingly,
focusing on documentation, valuation, STP, counterparty risk monitoring
and (especially) collateral management systems. Firms should conduct
an immediate beauty parade in order to evaluate the collateral
management/transformation as well as derivative clearing capabilities
of all the counterparties, and they may consider the merits of industry
efforts to address the shortfalls in collateral provisioning if relevant to their
investment strategy.
10
Stress testing applies to regulations, not just risks
The notion of next generation regulation is somewhat puzzling, but
is taken in this context to signify measures on the horizon that could
substantially affect on the business or operating environment for an asset
manager. Many of the measures are political in scope or somewhat diffuse
and may or may not impact asset managers and their clients directly.
But several of the proposed measures have the weight to create tectonic
shifts. Asset managers should remain vigilant to these relatively known
unknowns and begin scenario modeling in the same manner as they might
model for extreme market scenarios. Known measures with unknown
effects include the Shadow Banking Resolution (impacting ETFs, MMFs
and SBL/repo practices), EU Banking Union/Liikanen (single supervisory
and structural impacts on banks), CSD-Regulation (affecting settlement
cycles, compulsory buy-ins and disintermediation of agent banks in the
EU), Financial Transaction Tax (in France, Italy and at least 10 other EU
countries at the time of going to press), plus recovery/resolution planning
(or living wills) impacting the capital structures of not only global SIFIs
but, over time, the treatment of capital at clearinghouses as well.
We are focused very much on the
Dodd-Frank interpretative guidance,
which will create a new kind of
industry. We are positive because of
the emphasis on two-way collateral
and portfolio netting.
We see opportunities arising from the
Volcker Rule as prop desks are taken
apart and rendered into their moving
parts. We also see opportunities
to hire more staff. But the costs
of new measures far outstrip the
opportunities.
The regulations are working at
cross-purpose. EMIR would favor
rehypothecation and collateral
expansion, whereas shadow banking
resolution and CRD are working the
other way.
We are watching the shadow banking
resolutions closely to see the impact
on haircuts and general collateral
requirements. The effect of these
measures can only have a negative
impact on collateral and close
opportunities for growth in the EU
leverage space.
11
Appropriate resourcing is key, but so is how FTEs are
counted
For the frst time, the survey recorded how regulators had started posing
deeper questions about skill-sets and bench strength to cover all the
countries where a frm did business. The rate of growth of compliance FTEs
was not consistent across all frms it didnt vary by style, AuM or size of
existing team, and for some frms it remained resolutely fat. Businesses
should take a look at the appropriateness of all the control function
FTEs and ask whether regulators and signifcant clients would judge that
to be adequate given the slew of regulatory reforms under way. Firms
should agree to plan regarding the location of critical functions, such as
compliance monitoring, guideline monitoring, branch monitoring, client
onboarding/KYC, AML/sanctions, special investigations, whistle-blowing,
marketing, product development, regulatory reform and lobbying. There
is no right answer to this exam question, but suffce to say that frms
should benchmark themselves and be ready to evidence their total control
footprint spanning the 1/2/3LD when called upon to do so.
12
Systems quality is what counts, not just data quantity
Most frms in this survey made reference to their systems and data
remaining ft for purpose, but the overall fgures alluded to a marked
deterioration in the number of frms experiencing signifcant issues with
systems fexibility/IT change requests. The more advanced frms were
fortunate to be able to redesign their systems to cope with single-portfolio
view or single-legal entity look-through requests, as demanded by their
investment risk colleagues or compliance colleagues needing to comply
with measures such as FATCA, Solvency II or Dodd-Frank US persons
reports. Other smaller and more local asset managers were not so lucky.
Many were unable to cope with multiple client-driven or regulatory change
requests; some were challenged to compile suffcient data to support their
SRRI, ETF or ICAAP provision at will. Others struggled to integrate their
OMS/PMS/GL systems and controls, ensuring compliance all the way up
the chain of product distributors across all the countries where they did
business. Almost all would beneft from exploring the means to transfer
complexity by working in partnership with asset servicers to examine the
case for managed middle as well as back offce requests.
We operate via a hub and spokes
model here regional hubs and local
coverage in terms of spokes. We
probably have too many FTEs based
in the hubs and not enough in the
spokes. We need a lot more spokes
to face off to the regulators in each
of the major markets where we do
business and one of the key benefts
has to be that you need language
skills to understand the pitfalls in each
market center.
We have good KPIs for our dealers
and portfolio managers, with visits
to public companies logged centrally
so we can evidence proof to the
regulators if we need to.
We have practiced sound guidelines
for compliance management and have
good data taxonomies here. We have
been working hard on data quality and
we reckon weve made something like
a 70% improvement rate over the past
three years.
Compliance management for asset management 2012 survey 12
Managing complexity from overlapping regulatory
directives, complying with regulatory interest
and mitigating the potential for reputational
risk continued to be the top key motivations for
compliance.
Survey fndings
The high-level drivers were similar (see Figure 1), but the difference this time around
was the proportionality and the appearance of several new areas of awareness for asset
managers. In 2011, 69% of respondents were concerned about the sheer volume of
regulations on the horizon and the challenge in fnding the time to keep up with all the
changes. In the current no stone unturned regulatory climate, that fgure had climbed
to 90% of respondents. This years respondents felt challenged to keep abreast of all the
material while performing their day job. Possibly given record levels of fnes over the
2011-12 period, the corresponding fgure for frms wishing to avoid reputational damage
also showed a steep increase from 58% in 2011 to 81% in 2012.
To manage complexity from overlapping directives or avoid reputational impact, 45% of
respondents had either appointed a Head of Regulatory Reform (often reporting to the
Head of Compliance or Head of Legal function) or were specifcally relying upon their
parent bank, insurer or asset managers strategic program management offce (PMO)
function in order to formalize this process nearly six times as high as the 8% fgure
recorded in 2010. Firms employed this function for varying purposes, ranging from
anticipating future measures, lobbying, strategy, business development and product
development. The factor ratio for proof of delivery was 56% business-led and 44%
compliance-led.
Figure 1: High-level justifcation for the compliance management function
The 2012 survey also revealed new areas that need to be on the radar screens of the
Heads of Compliance: a need to support offering differentiated and personalized services
to clients mentioned by 29% of respondents; a specifc desire to comply with client
asset/money protection rules (41%); a desire to stay abreast of future shadow banking
rules (45%); a focus on recovery and resolution planning (9%); and for UK frms at least,
avoiding a referral to a 166 process (or the equivalent) (29%). The primary new concern
was a redenomination focus in the light of developments in the Eurozone (60%). Having
modeled various extreme event scenarios and the ability to move into new currencies
at will, respondents mentioned an uncoordinated euro breakdown as their primary worry.
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3 4 2 1 5
Key:
CM4AM Survey 2011
CM4AM Survey 2012
1 2 3
Ranking:
CM4AM Survey 2011
CM4AM Survey 2012
1 2 3
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The primary driver is the need to
design products for the long-term
investor and to help build trust in
where the environment is going.
The biggest driver for compliance
has been the drive towards client
centricity. We closed some strategies,
for example, where contracts were
prejudicial.
In the future, we will be very much
focusing on the reputational
consequences, given that our
selling points are conservatism,
trustworthiness and maintaining
regulatory discipline. The institutional
mandates in JP/TW and CN are very
hot on the latter if you receive a
regulatory discipline notice, you dont
get awarded a mandate for three
years in these countries.
Regulatory reform is a key component
of what we do, and it accounts for
some 10% of compliance time. We
would like to broaden the team and
carve it out from compliance as a
whole.
The motivation is the volume of
regulatory change combined with
no meteoric growth in assets, plus
the degree of increasing regulatory
overlap and encroachment. We dont
have a formalized reg reform presence
here but do maintain a strong focus
on governance and stewardship.
The volume and level of complexity of
regulatory changes, potential changes
and drafting issues are greater than
anything we have ever experienced
before.
Survey fndings
Compliance functions need to help their frms understand the rules against which they
will be judged and to help them to align their strategic objectives with customers that
have been sold products. This survey showed a growing percentage of respondents (78%)
indicating that they operated within a united one compliance culture spanning business
lines and geographies (see Figure 2).
Figure 2: Slight return of the star fund manager culture among asset managers
Yes
Partly
No
We have a one compliance
culture in evidence

Does a "star culture" exist
within the rm?
2012: 26%
2011: 23%
2012: 38%
2011: 38%
2012: 36%
2011: 39%
2012: 78%
2011: 76%
2012: 22%
2011: 24%
The notable difference was the growing evidence of a star culture creeping back
into the business since the failures of New Star and Gartmore in 2010, with 26% of
respondents indicating its presence by way of signifcant or excessive portfolio manager
conviction (up from 23% in 2011 and 18% in 2010) and only 36% attesting to its absence
(down from 39% in 2011 and 48% in 2010). Even in cases where there was not a strong
fund manager conviction culture, many houses were contemplating a move into active
strategies, active indexing or OTC derivatives, involving a relatively high degree of
specialism portfolios in order to add outperformance at greater levels of risk.
Impacts galore, but innovation opportunities are more rare
Heads of Compliance were queried on their top three/top fve risks keeping them awake
at night, and the results are shown in Figure 3.
The top risk category by far (unsurprisingly) related to the sheer number of global,
regional and local regulations to manage. However, the subsequent breakout patterns
showed interesting groupings. The next four risk issues consisted of changes in
regulatory issues and priority; fund monitoring/investment risk issues, front offce
order issues (e.g., market abuse), and a focus on US issues specifcally (including
extraterritoriality).
The next breakout consisted of several items with current topical interest, such as
managing the complexity of collateral management issues; regulators/investors
retrenching toward home territory; product risk, including prevention of mis-selling;
plus a focus on retail, MMFs, ETFs and their incoming regulations.
The FSA is clearly maintaining its
approach of regulatory intrusiveness
and the number of information
requests has increased. The FSA are
not listening or wanting to listen they
seem to know the best way to do
things. They want to be respected but
that hope is unrealistic as they cannot
be penal in approach on the one hand
and expect frms to confde in them on
the other.
The new style of the FSA has
dispatched the concept of relationship
management out of the window. If
it exists at all these days, its very
sparing and themed visits are not
very realistic. The new FSA approach
in terms of proving the negative is a
design around failure and not a design
based on cooperation with the frms.
The Board understand the need for
investments behind regulatory reform
and compliance but theres only so
much tolerance around regulatory
bandwidth. They understand the point
of the capital measures such as Basel
III or Solvency II because they get PnL
and capital, but they dont really get
what measures such as AIFMD are all
about.
We are concerned at the new
regulatory powers at the FCA and
the tone of the regulatory dynamic,
which is likely to be more aggressive
than pragmatic. We are concerned at
the direction of travel of the ARROW
process and whether the FCA will
construct a brand-new framework or
process.
The regulatory changes are driving
hot and cold, and investors are
asking very detailed and penetrating
questions.
Measures such as AIFMD, FATCA and
the MiFID II proposals are the most
pressing right now, but we are hopeful
of an intergovernmental agreement
on FATCA in the Nordics.
Figure 3: Top compliance risks keeping Heads of Compliance awake at night
79%
63%
45%
18%
5%
Sheer number of global, regional and local regulations to manage
Changes/variety of regulatory issues and prioritizations
Fund monitoring/investment risk issues
Front ofce order issues (e.g., market abuse or order aggregation issues)
Focus on US issues specically including extraterritoriality
Complexity of collateral management issues
Regulators/investors retrenching toward home territory
Product risk including prevention of mis-selling
Front ofce trade issues (e.g., best execution or allocation handling)
Client asset/client money protections and complexity of the CASS rules
ARROW/ICAAP in sights during 2012-13 and FCA response
Impact of regulations on specic illiquid asset classes (e.g., property focus)
Focus on retail, MMFs, ETFs and their incoming regulations
Policy and procedural complexities (and revisions of the same)
Need to mitigate possibility of being served with a 166 notice
Compliance monitoring/systems and controls
AML/ABC/nancial crime and sanctions checking
Governance issues
Transaction monitoring and reporting
Recovery and resolution planning for parent, etc.
40%
26%
12%
11%
49%
50%
31%
30%
37%
38%
38%
37%
37%
29%
25%
The list also included several items of interest to asset managers operating in the UK and
thus regulated by the FSA. These items were client asset/client money protections and
complexity of the CASS rules, front offce trade issues such as late trade allocation
handling, ARROW/ICAAP in sights during 2012-13, and the need to mitigate the
possibility of being served with a 166 notice.
There were also interesting results when it came to respondents grading the overall
importance of specifc regulatory measures by priority and by impact on the frm in terms
of extra due diligence, reporting and general cost to the frm (see Figure 4).
Figure 4: Top regulation categories receiving special attention in 2012
High
M
s
High
i
o
r
i
t
y

f
o
r

I
C
M
P
r
i
Medium MLD III
Clie
P
Bribery
Act
SSR
(new
Medium
C
PRIPs
Low
MLD III
Medium
Likely Impact on
Low
D R A F T
FOR DISCUSSION
PURPOSES ONLY
UCITS IV/V
AIFMD Bribery Act
FATCA
FATCA
AIFMD
UCITS IV
EMIR.
MiFID II RDR
Client
Money
Product
Reg.
RDR
FATCA
EMIR
Shadow
Banking
MAD II
Dodd Frank
S II
ent Money
Product
Reg.
PRIPs
S II
MiFID II
CRD III/IV
MAD II
g
(new!)
R
w!)
Dodd Frank
High
CRD III/IV
g
High
n IMs
Key:
Large priority shifts are shown by the blue arrows.
Large priority and impact shifts are shown by the gray arrows.
Thin lines signify lowered priorities and/or impacts, and
thick lines signify raised ones.
Note: The analysis does not include mandatory areas of importance such as
166 notices or ARROW/ICAAP, which are high priority by denition.
The Bribery Act is a huge thematic
focus with the FSA right now and
we worry about FSA fnes. The FSA
always had powers to intervene, and
now the other European regulators are
feeling the desire to do so as well.
Our policies cover AML and will
need to cover ABC as well over the
next six months because the BaFIN
are showing much more interest in
hospitality payments than before.
The Dear CEO letters issued by the
FSA asking questions on what frms
would do if their outsourcing party
collapses has posed diffculties. It is
commercially unrealistic to expect
frms to be able to repatriate the
functions theyve outsourced to third
parties or to maintain a second set of
arrangements on hot standby.
We heard that the FSA have written
to frms to inquire about their
outsourcing arrangements and
specifcally the contingency plans in
case of insolvency. But weve lost the
people and would fnd it impossible to
repatriate what we do.
Our strategy is to be disruptive to the
market. We already have SRI funds
and plan to land more from our Irish
platform, plus plans to move into the
active business, and not just for ETFs.
But the ratio of opportunity to threat
is rapidly diminishing under the weight
of overregulation at global, regional
and local levels.
RDR creates the opportunity for new
share classes, and our custodian arm
will be interested in developing new
platform services with AIFMD in mind.
There will be opportunities to create
new products for insurers under
Solvency II e.g., duration matching
swaps, or other products which dont
entail large capital requirements.
Survey fndings
The main areas of focus in terms of priority and impact
1
were AIFMD, UCITS IV/V and
FATCA, although there was evidence that the signing of the recent model intergovernmental
agreement (IGA) on 26 July 2012 reassured some frms that the impact would be less
than feared. Measures growing in priority (often correlating with impact) included CRD,
Solvency II, MAD II, MiFID II, EMIR, Client Asset/Money Protection and (especially) Product
Regulation. Shadow banking (and the cross-impacts on the supply of ETFs/MMFs and on
stock-lending/repo) was a new entrant in 2012. Measures slipping back in terms of priority
and impact consisted of Bribery Act (largely implemented) and particularly PRIPs (possibly
correlated against the risk of Product Regulation with each EU Member State following its
own course).
Although most frms were interested in how to innovate, only a minority of respondents felt
confdent enough to state that they could actually see concrete opportunities to innovate
as a direct result of forthcoming legislation (see Figure 5) as European regulators insist that
strategic objectives must align with how customers have been sold products.
Figure 5: Top opportunity categories cited by respondents in 2012
New
sectors
New
alternatives
New share
classes
New custom
products
New x-asset
products
SRI/ESG
New trading
tools/venues
New
distribution/
master-feeder
New collateral
mgmt./repo
New
platforms
New
vendors/
services
Opportunity
to reposition
0
2
4
6
8
10
12
14
Although the number of frms looking to develop new fund ranges, new products or new
services was not high in terms of strict innovation, 76% of respondents (up from 72% in 2011)
claimed to be exploring/designing new products or services in order to take advantage of
the regulatory measures. Specifcally, 33% of frms indicated that they were open to the
opportunities to build greater levels of trust by focusing on ethics and/or repositioning their
reputational profle.
Opportunities included:
Almost all asset managers considered the creation of new products as innovation. LDI,
portable alpha (transferring portfolio outperformance from one investment category to
another) and variants of ETFs (e.g., strategy) were mentioned.
Other examples included entering emerging markets; developing farmland, infrastructure
or property funds; developing new OTC instruments such as variance swaps; ESG/SRI; or
focusing on specifc types of distressed assets such as packaged loan repayments. RDR
share classes were also mentioned.
Creative solutions tailored to meet the needs of each client were cited by some
respondents in terms of defning innovation. Examples included pooled LDI funds,
building-block QIFs, tailored ETFs and custom liquidity swaps.
New cross-asset opportunities included regulated and derogated products
(e.g., parallel structured loans).
1 The scores refect the average priority/impact scores of all the frms in the survey where the item was cited, scored H/MH/M/LM/L and then normalized per the number
of respondents where the measure was relevant. For example, AIFMD was cited as relevant by 38 respondents, but Solvency II by only 20 respondents in 2012s sample

We are taking stock of Solvency II
because we feel this will create
changes in duration matching and
opportunities to move into new
collateral and derivative areas, given
boutiques increase their exposure to
insurance assets.
We are excited by the product design
opportunities post-RDR. There
are corporate treasurers who are
investing in inappropriate CNAV funds
and we see opportunities to deliver
products which are more suitable per
UCITS V/VI. We see opportunities in
moving into the LDI space as well.
The opportunities we would expect to
see from regulation include: 1) real
estate debt coming out of Solvency
II; 2) new UCITS IV ManCos; 3) fund
rationalization/new distribution;
and above all, 4) positioning around
benefting the client to rebuild trust.
We launched new RDR share classes
to be in the game. But we see
better opportunities under UCITS
VI to create hybrid funds with long-
term investment management
characteristics, such as more property,
multi-asset or infrastructure funds, all
of which must be launched with huge
care.
Some frms defned opportunities to innovate in terms of offering improved risk
models/risk optimization. Others defned innovation in terms of productivity/effciency
of product manufacture/distribution/IFA or research portals according to principles
such as total quality management (TQM).
Firms with a quantitative orientation saw innovation in terms of making improvements
to static or dynamic SAA/(G)TAA or improving currency overlay, portfolio insurance or
multi-asset capability.
Finally, a minority cited the development of platforms, modeling tools or full-blown
vendor solutions as innovative.
Good governance must take full account of product risk and be
reinforced by good behavior
Corporate governance is traditionally defned as the system by which companies are
directed and controlled and as a set of relationships between a companys management,
its board, its shareholders and its other stakeholders. Historically, the implementation of
corporate governance frameworks has varied signifcantly between EU Member States as
a result of differences in cultures, legal systems or differences in corporate practices. In
2012, the mood from consulting with frms across Europe suggests that good governance
additionally has to take full account of product risk.
The results from the Risk Management for Asset Management 2012 Survey showed
that 95% of respondents felt that their governing body was clearly defned, setting the
tone from the top, and that 94% of respondents felt that their functioning governance
structure was clearly defned, in terms of participation of risk management responsibilities,
appropriate demarcations in terms of accepted lines of defense, participation of NEDs,
defned standards for stewardship, and, above all, acceptance of the same by the board.
There was evidence in this survey that regulators such as the FSA, IFSA, BaFIN, AFM, CSSF,
FINMA and those in the Nordics were all looking at culture within asset manager frms
in order to see if the behaviors were proportionate. There was focus on portfolio fees in
Sweden and Germany; on inducements in the UK, Netherlands and Germany; on leverage
in Switzerland; and on TCF principles in Denmark, Norway, Sweden and Finland.
The UK had been focusing on many of these principles already, and the FSA devised the
ARROW II process to identify the main risks to statutory objectives as they arose. Since
the launch of ARROW in 2007, ARROW visits have remained a central area of focus for the
FSA, concentrating the minds of the compliance, risk, internal audit and business/senior
management teams alike within asset manager frms.
Previous compliance surveys had indicated that management, governance and culture
has remained a hot spot for FSA attention cited by 79% of respondents. See Figure 6
below:
Figure 6: Comparison of known areas for ARROW focus (mentioned by % of frms in survey)
We see opportunities to innovate from
our LDI business, our FI/alternatives,
our farmland funds and our debt
recovery funds.
Weve integrated compliance and risk
effectively so the compliance strategy
falls into risk in terms of systems,
embeddedness, staff training and
performance appraisal.
The business culture of a frm has to
also take into account the implications
of launching new products, ensuring
that compliance buy-in during every
stage of the product cycle. I used to
be a trader and have invested the
time to really understand the frms
products, which is the key to effective
dialogue.
We dont have or need a CoE as we
dont have US parentage but we have
equivalent policies covering CoI, PA
dealing and best execution. We are,
however, performing a complete
overhaul review in search of
consistency. Weve thought about an
overarching strategy but the danger is
a loss of detail.
Theme: Current areas of focus and relative
mention of RMP actions by respondents:
Senior mgmt. commitment, strategy and process
Product design and governance
Marketing and promotion (guaranteed products)
Sales and advice (mis-selling/investor protection)
Front ofce/conduct issues
After sales service and claims
Complaints handling
Culture (including behaviors/ethics) and reward
Strategic change
Relationships with third parties
Management information
Note: Client concentration also raised!
High Medium Low
Environmental Business model Controls
Oversight and
governance
Mitigants Net risks
Customers,
products and
markets
Business
process
Prudential issues
Customer
treatment and
market conduct
Operating
Business risks
Oversight and
governance
Total
Customer, product
and market controls
Financial and
operating controls
Prudential risk
controls
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Financial
soundness
Controls
Functions linked to SREP/ICAAP processes
Very
frequent
mention
Mentioned Some
mention
32% 79%
50% 20% 17%
67%
40%
43%
Frequent
mention
Compliance strategy
35%
New
New
New
New
Excess
capital/
liquidity
Compliance mission/vision statement in evidence
Strategy consistent with functional and regional objectives
Strategy consistent with ExCo attention per BusR, OpR,
PruR, RegR, LiqR
Strategy supported by appropriate monitoring and
surveillance in 1/2/3LD
One compliance culture in evidence in terms of
stated aims/reinforcement
One compliance culture by best practice,
challenge, reporting, etc.
This survey illustrated how the focus on customer/product/market controls was
mentioned by 67% of respondents, a signifcant rise on the 2011 and 2010 fgures
(mentioned by 58% and 42% of respondents, respectively). Particular areas for focus
regarding the latter elements included frms offering guaranteed return products and
absolute return products, as well as the correct classifcation of products, clients and
processes relating to these products. Also given uncertainties in the Eurozone and
constant regulatory changes, 32% of frms cited environmental risk (external risks
impacting their business models), a signifcant increase compared with 2011.
Another area of departure on the part of regulators concerned questions in two specifc
areas relating to culture. The frst line consisted of deeper questioning around areas
such as compliance strategy and consistency, perhaps echoing the direction of travel that
was adopted by the US within the Sarbanes-Oxley legislation (specifcally Article 404):
Evidence of a compliance mission/vision statement in place (identifed as used in
some form by 35% of respondents)
Evidence that the strategy was consistent with functional and regional objectives and
consistent with ExCo attention and appropriate risk committees
Evidence that the strategy was supported by appropriate monitoring and surveillance,
showing a one compliance culture in terms of stated aims, reinforcement,
challenge, reporting and best practice aspiration
Survey fndings
The second line of deeper query was more ad hoc, consisting of selective questioning
around areas such as the following (see Figure 7):
Figure 7: Responses concerning selected areas by way of Critical Governance/Culture
The tone from the top percolates
the business to do the right thing
for clients. We survey every client
on a rolling three-year basis, and our
CoE is imbued within our partnership
culture which maintains a long-term
(decades) view. The measures are
tied into the Risk Appetite and six TCF
outcomes, and we feature mentoring
for the business and control functions
and adopt a partnership liability
approach to risk as appropriate, so
we tick most of your boxes. This
plays very well to the exacting North
American client base.
The frm has linked our compliance
management policies to TCF and risk
appetite, with training sessions in both
the UK and Netherlands. We also got
our outsourcing agent to sign up to
our policies.
Elements of the areas for management, governance and culture
Environmental Business model Controls
Oversight and
governance
Mitigants Net Risks
Customers,
products
and markets
Business
process
Prudential issues
Customer
Treatment &
Market Conduct
Operating
Business risks
Oversight and
governance
Total
Customer, product
and market controls
Financial and
operating controls
Prudential issues Prudential issues
Prudential risk
controls
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Financial
Soundness
Controls
79%
Excess
capital /
liquidity
Theme: Critical governance/culture elements
Center of excellence/code of ethics (CoE) owner
Owner has point of presence with linkage to key committees
Challenge culture; appreciation of business conduct risk
Statement of ethics (SoE) in direct company-level controls (e.g., US parent)
CoE/SoE linked to a company-level control framework
CoE/SoE sensitivity analysis and risk appetite derived
CoE/SoE linked to measurement and management of control function staff
CoE/SoE risk appetite extended per the six TCF outcomes
CoE/SoE extends beyond the rm to subs, branches, etc.
CoE/SoE extends beyond the rm to outsourcing agents or third parties
CoE/SoE values discussed with shareholders or critical clients
CoE/SoE communicated and reinforced periodically by means of training
CoE/SoE linked to periodic disclosures or attestations to avoid CoI
MI for tracking qualitative and quantitative results in evidence
Tone from the top; examples of acceptable/non-acceptable case practices
New professional employees sign up on entry and appraised
New business/ops professionals mentored
68%
71%
76%
59%
59%
45%
57%
53%
21%
14%
35%
50%
63%
55%
54%
65%
19%
68% of respondents claimed to have a code of ethics (CoE) of some description,
sometimes emanating from the parent company (bank, insurer, US parent, etc.).
59% of respondents claimed to have an actual statement of ethics (SoE) of some
description, again either resident at the parent entity/US parent or as a stand-alone
document in use by control functions, HR departments, etc.
Only 45% of respondents could claim that these documents could be linked to a
corporate risk appetite and only 53% to the six TCF outcomes, for example.
Only 21% of respondents could claim that the scope of these documents extended
beyond the frm to subsidiaries and branches, and only 14% to outsourcing agents or
other third parties.
While 50% of respondents mentioned that these documents were communicated/
reinforced by means of appropriate training, with 65% claiming that new business
professionals signed up, only 19% claimed that these very same professionals were
mentored.
Only 55% of respondents could claim that there was appropriate MI for tracking these
documents.
The US code of ethics is posted and
keeps us in good stead; its no longer
good enough to have a conficts register
the regulators are looking for frms
to show more creativity in terms of
exploring how conficts can arise in the
course of the broader business.
We see that the SEC-style code of ethics
as becoming prevalent during 2013 and
we have a statement of ethics which
is reinforced through HR practices
and training/mentoring, although we
havent formally coupled it to TCF
outcomes just yet.
There is a CoE policy (one of the key
US requirements) which extends to
detailing conficts of interest and PA
dealing. There is a new focus on tone
from the top and identifying non-ethical
behavior.
The code of ethics is scary, American,
but the direction of travel. We have
already taken the steps to move onto
a more transparent framework of
key policies and procedures such as
managing conficts and other key
policies centrally plus featuring NEDs at
the board and verifying that compliance
can provide suitable challenge.
The code of ethics was completed for
our US operations congruent with our
UK manual. There is nothing to beat a
tone from the top where the CEO has
zero tolerance of malfeasance.
We kicked off a compliance vision in
EMEA and we are looking to roll it out
into our other global regions. The FSA
are increasingly talking about the
customer experience.
Capital remained king, with more frms paying attention to managing
ICAAPs given the direction of travel across Europe
The results from the 2012 suggested that the Internal Capital Adequacy Assessment
Process (ICAAP) continued to pose signifcant challenges for frms located in the UK,
Ireland, Germany and Luxembourg. The survey evidence suggested that regulators such
as the FSA, IFSA and BaFIN were placing much more emphasis on governance, unwinding
provisions over a 9- to 12-month period, reverse stress testing (RST), and the USE test
(linking risk appetite statements and frameworks to strategies, cultures and behaviors).
Regulators in the UK and Germany were keener in seeing evidence of advanced,
externally validated capital modeling and RST procedures made specifc to frms, not just
proportionate to market conditions. Here were some of the specifc factors that were
mentioned by respondents in relation to their ICAAP modeling:
Modeling extreme event risk arising from exposure to a counterparty impacted by a
Eurozone member default or implosion of critical investor or investment destinations in the
portfolio
Loss of portfolio management team, loss of start fund manager(s) or the latter under
investigation by the regulator
Reputational scandal, such as mis-selling of guaranteed products, a major fraud scenario
or failure to manage client money (FSA CP12/22 & CASS Money rules in the UK)
Modeling around stock market down by more than 40%, or AuM down by more than 20%
and/or 10% client redemptions by number
Lack of provision to prepare for failure/instability of parent (e.g., bank or insurer or
material counterparty collapse, such as a Lehman or MF Global type)
Failure to model for a lockdown of the repo or collateral markets under conditions of
market stress (elevated VIX index, high spreads in OIS swap curve, high CDS spreads for
counterparty)
Signifcant front or back offce error(s) as in, greater than seven fgures such as
needing to reverse out trade or corporate action error(s), respectively
Insuffcient consideration in evidence when modeling liability in the event of a major
outsourcing failure, claim on liability or the extent of indemnifcation
Litigation action by major SWF investor or the result of class action, howsoever arising
The results from the survey also showed the spread in ICG fgures recorded for 39 frms
between 2011 and 2012 (see Figure 8). Although four frms in the survey managed to
lighten their ICG scores from previous levels, the trend remained upwards, with a new
normal set at between 130% and 170% of uplift vs. the highest of Pillar 1, Pillar 2 and
unwinding capital with some hedge funds, multi-style managers and platform distributors
particularly impacted. The greater the uplift in ICG scores, the less expected were the
results by some frms, particularly for those running platforms or multiple investment
styles, or expecting to take full advantage of waivers.
Figure 8: Comparison of known relative ICG uplifts (2012 and 2011 data)
to size, nature,
complexity...
Key:
Medium entities
Large entities (by AUM)
Strong brand
Retail footprint
Complex/illiquid products
Strong distribution/platform dependency
M&A/integration candidate/weak SYSC
Black box methodology/valuations
100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 300 400 500
Unexpected
score
Expected
score
Relative % ICG Uplift The new normal
10 rms 19 rms 10 rms
Survey fndings
Weve developed a compliance
strategy since January 2012 and our
plans are proportionate to the FSAs
risk outlook, with H/M/L priorities
linked to monitoring.
We are OK with the practices of
compliance strategy, but not the
mission, vision or linkage of the
objectives to functional and regional
objectives and/or committees which
is work in progress. We are fne with
the CoE and try to link it with our TCF
principles and dont have shareholders,
but we are woolly on factors such as
risk appetite and we can do better
on the MI. Ninety-fve percent of the
outsourcing is internal so the same
principles apply.
Culture-wise, weve come to realize
that transparency doesnt cure all ills.
Salespeople like easy conversations
with clients and dont feel comfortable
pointing out the faws or regulatory
pitfalls. They focus on making the
customer feel happy and take on
aspects where we cannot deliver. We
recognize that more education and
disclosure is needed to correct this.
The FSA were critical of us claiming
that our committees didnt keep
minutes. This has now been remedied
but it illustrates that everything we
do within the theater of compliance
must be evidenceable.
Weve always run an ethical bias
here with a focus on SRI and running
engagement surveys with our clients
on a rotational basis.
Our ARROW/ICAAP featured 36
interviews involving 6 FSA staff over
the course of two weeks. Were a
close and continuous frm but even so,
we felt that to be excessive.
The shifting of the CRD timetable has
caused concerns, particularly how the
measures will operate with COREP in
the UK.
As some elevated ICG scores were recorded from mid-tier or alternative asset manager
frms, clearly other factors were at work, several of which were product- or client-related,
such as the following:
Third country or offshore governance; ineffective interview process with NEDs, board
members, senior managers or control function representatives; or poor SYSC in evidence
Distributors with a strong platform or client money presence, carrying products targeted
at retail-classifed consumers
A strong brand or reputation coupled with a signifcant retail footprint in the country
concerned
Firms offering guaranteed or absolute return products, exacerbated if offered to retail-
classifed consumers or there was lack of challenge on suitability
Complex, illiquid or non-fungible products being manufactured or distributed, or models
being operated; compounded if the frm operates a black box methodology for valuations
or is too reliant on specifc third parties
A relative lack of rigor or challenge surrounding the amount of capital provisioned for
unwinding or insuffcient commercial logic behind the same
The frm was operating a black box methodology when it came to valuations or was too
reliant upon any third party, particularly if there was insuffcient evidence of ft and proper
due diligence
Whether a frm should participate in a signifcant corporate event such as a merger or
acquisition
There were signs in the UK, Germany and Italy which have a strong culture of
independent distributors of regulators linking prudential measures such as capital
provisions with conduct of business measures around fduciary duties. The direction of
travel would require asset managers, and other market participants that feed into the
sale and distribution of fnancial products, to act in their customers best interests, avoid
conficts of interest and behave in a way they would hope to be treated themselves.
Most frms were aware of evolving product regulation measures across
the EU such as product intervention and PRIPs, while the UK was
focused on the rollout of RDR
In the UK, the Financial Conduct Authority (FCA), the new regulatory body created from the
current FSA, will be focusing on the distribution of products as well as the responsibilities
of wholesalers as part of a comparatively interventionist approach. Martin Wheatley, who
will be heading up the new body in January 2013, commented at the FSAs asset managers
conference on 25 September that the FCA would not be authorizing businesses if they
could not deliver good outcomes for consumers:
Asset managers in the UK should treat their customers fairly and could be subject to
more onerous professional obligations. Asset managers have a role to play in educating
customers fnd what they need and should work closely with intermediaries who sell
products to consumers. Such expectations should be at the center of how all regulated frms
operate.
The formation of the FCA coincides with the introduction of the Retail Distribution Review
(RDR) in the UK,
2
which is designed to help consumers achieve a fair deal from the fnancial
services industry and have greater confdence in the products they buy and in the advice
they take. The FSA has set out when trail commissions can continue to be paid on advice
given on existing products after the deadline of 31 December 2012. The rollout will
coincide with the introduction of the Provisieverbod (client interest measures that focus
on achieving greater transparency, fairness and accountability in the Netherlands) and
similar moves in Denmark.
2 Retail Distribution Review (RDR) will come into force in the UK at the start of January 2013. Under RDR, product providers will not be allowed to pay commissions
and advisors wont be allowed to receive commissions. The FSA feels that product providers should not be allowed to buy distribution, hence platforms will no
longer be paid by product manufacturers and will need to be paid by the parties receiving the services (i.e., the IFA and investor per the FSAs CP12_12). Proponents
of RDR reckon that the measure will simplify the landscape by bringing about greater fee transparency and a greater sense of a level playing feld between product
manufacturer, product distributor platforms, IFAs and clients
Feedback from this years survey from the 37 asset managers impacted by RDR was as follows:
Only 19% of respondents felt positive that the introduction of RDR would mean more cost-
effective ways of delivering investments, products and services and would make advice
available to a wider range of consumers.
32% of respondents believed that the move toward unbundled pricing would be fnancially
viable for the majority of players.
Only 30% of recipients felt that the introduction of RDR would really simplify the landscape
or require new controls to evidence unbundling and TCF; 43% of respondents held the
opposite view.
62% of respondents expected to see an increase in platform use and/or dependency
under the RDR.
74% of respondents expected to see a signifcant degree of industry consolidation
under RDR.
43% of respondents felt that removing commissions could give a boost to exchange-traded
fund (ETF) product classes and passive investments such as trackers.
28% of respondents agreed with the assertion that the future charging model under
RDR will see margins accruing to the advice section of the value chain, and 22% of
respondents completely disagreed.
57% of respondents were relatively comfortable with the differentiation between offering
unbiased, unrestricted advice and restricted advice.
Despite the fact that RDR took effect 31 December 2012, respondents made mention of
several unanswered questions:
Per CP12_12, the FSA is offering platform service providers time to make the
necessary changes until a proposed implementation date of 31 December 2013.
How will the transition be managed?
If unit rebates to consumers is still permitted (by means of units allocated), then
presumably this would not prevent rebates from being made through additional
investment into the product (unit rebating)? Would this be easy for investors to
understand?
Might some fund managers retain their most expensive share classes for direct to
investor business with completely different share classes/rate books for institutional
clients?
Respondents suggested that not all frms had publicized how they would treat
advisor payments on individual retail legacy products after RDR takes effect. Some
respondents were exemplary in specifying precisely how they would treat commission
payments on legacy products. For instance, when trail commissions would remain,
treatment of commissions on the original investments/increments would be on a non-
advised/advised top-up basis. Would this be compulsory post-RDR?
Respondents from other continental European Member States (as well as the UK)
also made repeated but more tentative references to the Packaged Retail Investment
Product Directive,
3
a suite of measures due to take effect in 2015 that will be applicable
to products that provide for capital accumulation where an element of packaging is a
feature (see Figure 9).
3 The Directive is a series of proposals to overhaul the marketing, sales and distribution of retail investments marketed directly to consumers, broadly falling into
four groups: investment funds, insurance-based investment products, retail structured securities and term deposits. It represents a shift of emphasis toward the
regulation of products as simple vs. complex and the reclassifcation of clients. There will be formalized procedures concerning pre-contractual disclosures, product
life cycle information and continuing obligations, defnitions of execution-only (and complex vs. non-complex products), fee disclosures and cost transparency,
disclosure of conficts of interest in the sales and advice process, and details of insurance policies. PRIPs would be structured under a single common framework to
allow comparisons between products featuring a high level of standardization, allowing responsibilities to be apportioned between product provider and product
distributor.
The FSA are starting to ask detailed
questions around CASS, specifcally
around how systems would operate
in case of insolvency. In principle,
all contracts should terminate on
insolvency, but there are different
practices for different EU Member
States.
Client money the resolution pack
[the FSAs CASS-RP] is a real hassle.
We understand that the desire is
not to have the role performed by a
Compliance Offcer but weve learned
that if this is performed by operations,
you end up in a real mess because
of the level of attendant detail that
needs to be supplied by compliance.
compliance should be involved
throughout.
RDR is a pain working out which
distributors to work with, trying to
communicate with them to determine
if new share classes are needed, and
checking that they are not asking
commissions for new business.
We have an established platform
business and we cant always afford
to be at the cutting edge. The new
players can take advantage of the
latest technology more tuned to meet
the needs of RDR, for example.
We are dotting the is and crossing the
ts with preparing for RDR by focusing
on investment advice to retail clients,
issuing RDR-accessible asset share
classes. We were surprised to hear
that the scope of RDR might extend
to cover our business model in the
Channel Islands.
Survey fndings
The greatest opportunity for ETFs
is the retail market, and we see
regulations such as the RDR in
the UK and Provisieverbod in the
Netherlands as a means of supporting
the retail distribution of ETFs. We
are also looking at distribution into
Denmark, Germany and Sweden and
think that there may be opportunities
in countries which dont have such a
dominant bancassurance model.
We dont place ETFs in our clients
portfolios but the Danish stock
exchange are bringing out more
products with ETF-like characteristics
so a taxonomy is needed to avoid
confusion.
PRIPs KIDs will happen and weve
already provisioned for it. Weve
got to resource it and the board are
concerned at the spend on compliance
but its mandatory. They would like
reg changes to be defnite. Weve lived
with indicators of risk in our products,
weve done work to establish what
constitutes investment advice, and
we havent had claims or distribution
issues.
We adopt a Lexus approach here to
engineer the processes that might
lead to conficts out. We carefully
specify what the issues are likely to be
and engineer some 80% of the issues
out. This is an important support
function to the business, who are
keeping the focus on the customer.
Figure 9: Benefts and challenges arising from the PRIPs and product intervention measures
U
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s
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c
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a
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l
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i
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g
Neutral
Making advice
available to a
wider range of
consumers
Economies of scale from more
cost-effective ways of delivering
products or beneting from
product synergies
Product innovation and
improving stickiness
Greater
transparency for
consumers
EU/EEA-wide
Uncertain
impacts on
product
placements
Potential
disincentives for
platform use
B2C
New SYSC
to support
unbundling
Harmonization
and updating of
content of KIDs
Could accelerate
product switching
+30 -30
Creater consistency
with UCITs and
MiFID II direction
of travel
(synergy savings)
Grading products as
complex vs. non-
complex, mapped to
risk appetites of retail-
classied clients
Increased
responsibility to
train advisors
Focus on
inducements
Respondents were generally supportive of the notion that PRIPs measures could apply
UCITS-style Key Investor Document (KID) standards to pre-contractual disclosures and
marketing materials. Doing so would enable investors to make informed decisions by
focusing on information that is fair, clear and not misleading and that is presented in a
format allowing for easy cost, risk and performance comparisons.
The four core components of the PRIPs measures are:
Standardizing pre-contractual information
The issue of a KID akin to the UCITS model
Strengthened selling rules
Measures to prevent conficts of interest from developing
Although responses were tentative, the areas that caused greatest levels of
consternation concerned the application of KID-like standards as below:
21% of respondents anticipated modeling challenges if existing KIDs needed to be
replaced by PRIPs KIDs after fve years and the resultant product sets needed to be
harmonized (e.g., per a prescriptive form of UCITS VI).
45% of respondents expected to experience challenges with the harmonization of the
form/content of KIDs (e.g., What is the investment? Can I lose money? What are the
risks, and what might I get back? What are the costs?).
74% of respondents agreed that the new PRIPs measures would require the frm to
prove a deep knowledge of complex vs. non-complex products and assess the risk
appetite of clients while taking steps to prevent conficts of interest.
Finally, frms could no longer be certain of a consistent direction of travel given that each
European State was showing signs of adopting divergent courses concerning product
regulation (see Figure 10). The AMF in France and the CBFA in Belgium had been pushing
prescriptive pre-screening for some time, mainly in relation to product intervention
around simple/complex products and execution-only (EXO) business.
Figure 10: Understanding of issues arising from applying product measures
Examples of
styles of
product regulation
across the
EU/Switzerland
TCF
Product
liability focus
Health
warnings
Prescriptive
restrictions
Portfolio
fees
restrictions
Product focus/
intervention
Inducement/
kickback focus
Distribution
focus
???
Leverage
restrictions
Risk indicator/labeling
e.g., SRRI for UCITS
(Per
AIFMD)
Other EU Member States had introduced product safety warnings (e.g., color codings in
Portugal or risk indicator measures in Denmark and Luxembourg). Respondents spoke
about current or proposed measures that might apply to portfolio management fee
charges in Sweden and Germany. On the face of it, with the spotlight increasingly turning
to the consumer investor, it seems as if short-term national responses will need to be
managed against the backdrop of regional regulation. The prediction is that business
and operating models may need to accommodate multiple ways of conducting business
across Europe over the next three years at least.
Given the short-selling regulation that took effect in November 2012
and future Market Abuse II and MiFID II restrictions, the relative
focus on front offce issues was unsurprising
Short selling is the practice of selling assets that have been borrowed from a third party
with the intention of buying identical assets back at a later date to return to the lender.
Italy, Spain, Belgium and France imposed selective bans on the short selling of fnancial
stocks from 12 August 2011 in order to curb volatilities in their stock markets in a bid to
cushion bank stocks from the initial consequences of the Eurozone crisis.
When it came to the results from the survey, 44% of respondents reported issues with
short-selling restrictions being introduced in an ad hoc manner under varying thresholds
and timelines per each country. One frm commented: We are OK on preparations for
the short-selling regulations. We are positive on the regulations because we see it as a
signifcant improvement on the current state of selective country bans introduced by Italy
and Spain.
The FSA are being deliberately
unapologetic, using early intervention
as a tool. If the FSA anticipate
that a product would lead to
future consumer detriment, they
will intervene earlier to prevent
that product being launched and
marketed.
The Danish regulator has been
gold-plating risk markers a traffc
light system depending on product
complexity and risk levels on
products for some time now. They are
focused on the fact that changes in
the loan market affect the mortgage
market.
Germany is going its own way now,
very proud to relay what it is doing
to ESMA and the BaFIN keener to
regulate more directly following
strong infuence from the Ministry of
Finance and the Ministry of Consumer
Protection. There are proposed bans
against future launches of open-ended
property funds, and the BaFIN are
turning their attention to closed-
ended funds (effectively companies)
and insurance branches as well.
We are impacted directly and
indirectly by the PIB. The measures
impact our real estate funds and
we have to make sure that our
distributors are compliant because all
materials will be checked by auditors.
Frances direction of travel toward
prescription and even product liability
is proving to be a nightmare for us.
Unlike many regulators, we dont see
transparency as a panacea. It can
sometimes act to the detriment of
client interests with regard to market
impact, availability of liquidity, etc.
Weve had to focus on areas such as
fxed income fund managers running
their own spreadsheets and are
wary to justify the use of suggested
brokers.
Survey fndings
Weve built our own front offce
controls because there wasnt an
off-the-shelf system suitable for our
needs. We prohibit our traders from
placing or receiving orders on mobiles.
We were quite careful about keeping
order data for a period greater than
six months.
Weve spent a lot of money preparing
for short-selling regulation as our
technical side hadnt caught up with
the regulatory requirements. In Italy,
the CONSOB has an elevated sense of
expectation and weve installed an IOS
system, whereas in Germany, we use
Bnext. We want to move onto a global
system which covers all our affliates.
There isnt centralized dealing on fxed
income. Pre-sounding out was a focus
weve done work on the monitoring,
training and short-selling impacts, of
both SSR and the Spanish rules.
The AFM are not going after market
abuse to the extent that the UK is
doing and the FSA is working to
the principle of guilty until proven
innocent, the opposite from a criminal
court procedure. Our entire front
offce performed attestations as
regards market abuse prevention.
Market abuse is a signifcant focus,
and we are particularly interested
in changing the way that analysts
interact with companies. We are
exploring going down the route of
establishing a legal intermediary,
partly for strategic reasons (lesser
dependence on sell-side research) and
partly for reasons of good practice to
manage conficts of interest.
Another added that: The CNMV approached us directly and gave us just 24 hours
to provide evidence that the frm was not operating naked shorts. This highlights the
ever-increasing burden from direct regulatory inquiries warranting a drop everything
response on our part.
Firms also demonstrated greater focus on monitoring and preventing forms of market
abuse, partly in anticipation of an upcoming revision to the Market Abuse Directive
(MAD II). Awareness was greatest in terms of preventing insider trading, breaches
in authorized trading, dark pool/algorithm (algo) manipulation, false/misleading
transactions and front running, in that descending order (see Figure 11).
Evidence of guarding against abuse on non-equities markets was more varied, with a
minority of frms evaluating the potential for abuse concerning inappropriate sounding
out in fxed income or focusing on company visits to companies on the part of portfolio
managers as two such examples.
Figure 11: Market abuse vigilance and comparison of front offce controls measures
0
5
15
20
30
35
25
10
Firms running
own trading
models/algos
Remediation
processes on
market abuse or
best execution
Compliance
framework
oversees trading/
operational
frameworks
Remediation
processes on
fairness monitoring
or late trade
allocations
Monitoring
done/desk or
per desk and
overall
Water-tight CSAs
given regulatory
developments
Management review of
correlation between
research spend and
execution provision
Current focus on voice
recording/electronic
communications
requirements (including
mobile recordings)
Adequate segregation
of dealing and fund
management
Firms running
centralized dealing
desks
Responses were highly varied in terms of the steps being taken to remediate front
offce processes. Avoiding conficts of interest (CoI) was a big theme in 2012 and is
now on the FSAs 2013 agenda. COBs 11.3.1 & 2 require a frm to have procedures and
arrangements that allow for prompt and accurate recording and allocating of client
orders. The term prompt was interpreted very differently across frms in the survey
responses ranged from intra-day to beyond trade date plus one for certain asset classes
between different respondents, so the survey found that preventive and detect controls
could differ on this basis.
Insider trading 74%
Breaches in authorized trading 62%
Dark pool/algo manipulation 58%
False/misleading transactions 56%
Front-running 54%
Short-selling breaches 40%
OTC derivative abuses 31%
Commission/inducements fraud 29%
Separation of info b/w desks 29%
Spoofng/layering 28%
Inappropriate sounding out 26%
Manipulation of splits/allocs 21%
Fiduciary breaches 17%
Asset pricing 15%
Securities lending fraud 5%
Price positioning around IPO 5%
Custodian collusion breaches 0%
Two areas of FSA thematic activity are examined below in terms of survey responses:
Late-trade allocations Late trade bookings whereby an asset manager can give
preferential treatment to one fund over another having seen the fll/price obtained.
Fourteen percent of survey respondents were paying attention to remediations in this
area. Examples of current workings included:
Establishing a clearly defned allocations policy ensuring fair treatment for customers for
all asset classes (e.g., fxed income and real estate).
Establishing a centralized dealing desk* to remove the ability to monitor for a price move
and preferentially allocate as a result. Sixty-three percent of respondents claimed to run
their own centralized dealing desks, but this didnt always extend to every asset class such
as fxed income or derivatives.
Encouraging electronic connections, such as FIX.* The use of electronic allocations allows
for an automatic time of execution, so real-time monitoring of late allocations is possible.
Encouraging pre-allocations. The extent of pre-allocation witnessed in the survey was
dependent on the investment style and the use of automated tools such as OMSs/PMSs
and FIX protocols.
Only 17% of frms were conducting fairness monitoring effective compliance
monitoring of all allocations over a period of time to ensure that the policy is being adhered
to along with adequate MI to identify those allocations that are out of line with the normal
percentage allocation across a family of funds.
*The use of a central dealing desk or electronic connections may not be possible or appropriate for
complex structures/products from a best execution perspective.
Managing conficts of interest The identifcation of conficts should not be purely
led by the control function areas there should be active engagement by the front
offce and reinforcement in terms of tone from the top (e.g., the board is actively
involved in reviewing the frms conficts policy on a regular basis, with conficts
identifcation/resolution embedded within the frms culture at all levels). Examples of
current workings included:
48% of respondents claimed that they had a compliance framework to oversee their
trading and operations and to focus on front offce accountability for the supervision and
monitoring of traders.
Some of these frms were ensuring that their compliance framework contained a specifc
conficts policy/register that not only identifed all material conficts and how they are
managed but also assigns owners to each confict and sets out how each confict is
monitored. Examples might include undue front offce infuence on remuneration or
promotions of support staff or inputs into trader appraisals by the 2LD.
43% of respondents ensured that there was an adequate and evidenceable segregation of
duties between a portfolio manager setting a funds strategy and the trader who executes
the order.
74% of respondents focused on voice recording/electronic communications requirements,
particularly on storing data from mobile phone transcriptions. Audit trail evidencing
included how traders had achieved the best possible result (best execution), sometimes for
quote-driven or illiquid instruments at the more advanced frms. For example, screen shots
were used showing comparable trades of the broader market, with effective monitoring
of best execution, including evidence where action has been taken in case best execution
was not achieved.
The use of expert networks is a
focus. We have a strong policies and
controls framework and even a script
for analysts to use to inform each
expert on the network and ensure
that conficts dont develop. We also
look at the provenance of information
that we receive, i.e., how trusted,
evidenceable, etc.
Market abuse is still up there as a
top priority given FSA interest and a
need for greater evidencing to satisfy
trustees.
There are too many regulatory
changes which are automatic, and we
are facing more queries from clients
than ever before about the level of
controls in the front offce to avoid
conficts of interest from developing
and prevent market abuse. Our stance
is to reduce conficts of interest from
ever arising, rather than manage
conficts of interest once theyre
apparent.
Were busy tightening up our market
abuse measures following detailed
inquiries by clients. The processes
include the pre-hedging phase, paying
attention to block securities sitting
on the OMS, and senior management
responses. We are however concerned
that we cant apply these techniques
to bonds.
Issues with allocations in the front
offce is a surprise. The FSA picked up
on the conficts theme with respect to
company visits. We are also having to
pay intermediaries to grant access to
companies in Japan which is a focus of
the JFSA, so this is a hot topic for us
right now.
The complexity generally has
increased and there is a huge focus on
front offce monitoring at present (e.g.,
new issues in corporate bonds or the
short-selling rules in countries such
as Spain take a lot of interpretation).
There is a strong focus on allocations
pro rata are not best because there
is a minimum economic size, so we
allocate according to a smallest frst
principle.
Survey fndings
We have very good front offce
separations, with a centralized
dealing desk and proper measures
to avoid abuses developing from late
allocations, etc.
Late trade allocation is a big focus
and we need to improve our record-
keeping capabilities given the
increasing FSA focus.
We dont like the use of dealing
commissions to gain access to
companies or company visits at all in
view of the potential for market abuse
via insider lists.
We found ourselves in the spotlight
because our commissions were
fragmented with no single owner,
infexibilities in our allocations
methodology, and over-reliance
on manual processes with no
consolidated view.
We are extremely careful about the
potential for market abuse during
company visits. We ensure that all
are recorded and chaperoned. And
sounding out is a no-no.
We focus on the forensics of the trade
data, particularly the downloading
of trade blotters, testing of best
ex fles (on a per trade basis), and
searching for anomalies. Our research
allocations are small or we pay for our
own research and corporate access,
whereas a CSA model introduces
incentives to create a budget and
spend more money unnecessarily.
Best execution policies will need to be
adjusted for OTC derivatives to take
account of the broader market and
two new considerations 1) use of
pre-trade compliance tools from DCMs
to determine if a trade is clearable and
2) the use of collateral optimization
tools to determine which CCP to use
on the basis of CCP pricing/choice.
The direction of travel that the US are
taking with SEFs will be interesting.
We are a bank-owned asset manager
and can transfer income around the
group; restrictions on inducements
would be a nuisance.
Results were also varied from questions concerning preparations ahead of MiFID II, which
could take effect as early as Q4 2015, coinciding with MAD II, IMD II and PRIPs. MiFID II
will introduce amendments to the conduct of business rules (such as suitability), data
consolidation (ECT), pre- and post-trade transparency for non-equities, and transaction
reporting and inducements, bringing about signifcant changes to deferred publication
arrangements, high-frequency trading (HFT), single-dealer platforms and broker-crossing
systems (BCSs).
The results from the respondents is presented below (see Figure 12):
Challenges in best execution A majority of frms (72%) indicated that they might
or would need to revisit their best execution policies in the light of MiFID II. Asset
managers would increasingly need to evidence quotes to clients with regard to the
broader market, especially when trading illiquid securities such as corporate debt,
synthetic ETFs, and infation swaps for demanding clients such as SWFs or clients
electing for retail-classifed protections. Firms trading fxed income, commodities or
OTC derivatives instruments such as swaps, options or forwards mentioned that they
would need to decide the optimum venues to connect to, which areas would need
reinforced audit trails, and which transactions would require CCP clearing. Some of
the latter might be centrally cleared (with corresponding implications for collateral
management and risk weights) while remaining instruments will still need to be
processed bilaterally.
Challenges from suitability and appropriateness 69% of respondents expected
issues with suitability/appropriateness testing, particularly with regard to new
retail classifcations of clients or potential restrictions with execution-only (EXO)
practices. The FSA issued CP 12/19 in August, demonstrating a marked change in
policy that signaled how the FCA intends to take a more interventionist stance than
that of the FSA, stating: We are making the judgment that the benefts of improving
customer outcomes for most retail investors outweigh the costs to the minority for
whom they may be suitable.
Challenges from changes to market structures 63% of respondents expected to
experience challenges in terms of changes to business models (e.g., connecting to
various types of venues, such as OTFs vs. MTFs). At the time of writing, the prevailing
view was that OTFs would be retained for non-equity trades (bonds and liquid
derivatives) only and limited to professional investors, and there was no mention of
how single-dealer quote platforms might be treated.
SYSC challenges in pre- and post-trade transparency for non-equities A greater
percentage of frms (58%) were expecting signifcant changes to systems and controls
to automate trade disclosure as close to real time as possible in comparison with
2011 survey. There were also highly varied responses concerning whether greater
transparency would necessarily be good for long-term liquidity.
Challenges on inducements 42% of respondents (up from 38% in 2011) expressed
concerns about the diverging directions of travel taken by regulators across the EU
during 2012. While the MEPs did not opt for a total removal on ban of commissions
at the ECON vote of 26 September, they emphasized a requirement for mandatory
upfront, explicit disclosure (with an ongoing suitability test as to relevance). The
compromise allowed EU Member States to go further in imposing restrictions
on fees, commissions or inducements under certain conditions relating to the
classifcation of products and the suitability of those products to be sold to retail-
classifed clients.
Third-country challenges 53% of respondents made reference to future third-
country complications arising from how regulators would treat non-EU investment
frms gaining access to EU clients. Rapporteur Markus Ferber MEP has argued that
the third-country rule should simply explain how non-EU states can gain access to EU
platforms, explaining that he favored equivalence principles rather than reciprocity as
the EU needs access to investors from third countries.
Figure 12: Attitudes expressed by respondents towards MiFID-related issues
Revisit best execution policies non-EQ 72%
Suitability/appropriateness challenges 69%
Challenges complying with MTF/OTF divisions 63%
SYSC challenges non-EQ 58%
ECT provision 54%
BCN/dark pool challenges 49%
OM/IOI disclosure challenges 45%
Complications from short-selling thresholds 44%
Order management storage issues 38%
Riskless principal category challenges 38%
Challenges executing commodities trades 25%
SBL or collateral management issues 25%
Circuit breaker complications 13%
53% Third-country issues (e.g., nonreciprocity or ET)
Asset managers had coped relatively well with UCITS IV, but several
frms expressed concerns with some aspects of UCITS V and the
general direction of travel of UCITS VI
The purpose of UCITS IV was to drive consolidation of the European investment fund
industry, both at the fund and service provider levels. UCITS IV supplied the industry with
the opportunities to introduce effciencies into their fund ranges and operating structures
with the introduction of:
Master/feeder funds
4
(through expanding distribution, consolidating products and
white labeling)
Cross border fund mergers (through consolidating products to achieve cost savings)
Management company passports, which consolidate management companies and
shift administration services to hubs
The results from the 2012 survey showed that most frms had implemented UCITS
IV comfortably, possibly because in many areas the directive operated under broad
principles in concert with the regulatory component providing prescriptive guidance.
The key sticking point had been the practical implementation of Key Investor Information
Documents (KIIDs), using source data derived from calculations of the Synthetic Risk &
Reward Indicators (SRRIs)
5
in 52% of cases (see Figure 13).
There were logistical challenges in amassing the necessary SRRI data to calculate the
standard deviation of the fund returns and ensuring that the data could be formatted
to allow for easy draw-down. Respondents also queried how each competent authority
would treat the SRRI risk buckets (whether simple vs. complex, on the basis of
transparency, liquidity or fungibility, for example).
4 A master fund can be created in one domicile; investors from other Member States may invest in this fund via a locally domiciled UCITS feeder funds, facilitating
the channeling of investments into a single master fund. Feeders in other countries may be able to take advantage of tax optimization and better serve certain local
distribution channels.
5 The UCITS IV 65/2009/EC REG 1 Art. 8 and CESR 09_716 specifes how funds are to be categorized into seven risk ratings, based mainly on their historical
volatility or in the case of newer funds, predominantly on the historical volatility of their benchmark. The calculation featured in the Synthetic Risk & Reward
Indicator (SRRI) varies by fund category, but more funds will end up following statistical risk approaches.
Defnitions of algorithms/HFT are
poor. We ensure that we operate by
manual intervention so that a named
individual is always on the hook.
The Irish FSA are focusing more on
best execution at an intermediate
level between what was expected
under MiFID I and what might be
expected under MiFID II. Theyre not
going to wait until 2014.
The FSA and the BaFIN are showing
every sign of applying restrictions to
dark pool activity, which will result in
less choice and increased prices.
We know that regulators and
politicians are attentive of correct
client classifcation and suitability,
and cognizant of a preference toward
retail client classifcations for some
institutional business in Italy.
We have concerns with some frms
supporting the regulators in splitting
UCITS or asserting that some entities
should not be pure UCITS per the
eligible assets directive. The Asia-Pac
market needs to embrace UCITS
but were seeing the UCITS brand
actually fragment in Asia-Pacifc in
Hong Kong-Tawain for example.
UCITS V introduces a precise
defnition of the tasks and liabilities
of all depositaries acting on behalf
of a UCITS fund, along with strict
liability for the primary custodian,
whereby depositaries will be obliged
to return instruments lost in custody
irrespective of fault or negligence
without any option for the principal
custodian to discharge liability in case
of delegated custody.
The approach taken by UCITS V differs
from AIFMD because UCITS V will hold
a depository liable for the return of
an instrument without the possibility
to discharge liability by contract. We
think that this is a deliberate variation
given the retail nature of most holders
of UCITS.
Survey fndings
Thirty-eight percent of respondents indicated that their frms were considering whether
to set hard and soft (key risk indicator) risk limits, with hard limits likely decided by the
guidance from individual regulators. Only 32% of frms applied a liquidity risk framework
(or management system).
Fifty percent of respondents expressed concern at the liability measures for depositories
and valuators under the forthcoming UCITS V and UCITS VI directives, respectively (with
both of the latter measures highly likely to be closely aligned with AIFMD). One alternative
asset manager commented: UCITS V introduces a precise defnition of the tasks and
liabilities of all depositaries acting on behalf of a UCITS fund, along with strict liability for
the primary custodian, whereby depositaries will be obliged to return instruments lost in
custody irrespective of fault or negligence without any option for the principal custodian
to discharge liability in case of delegated custody.
Secondly, 43% of respondents expressed concerns at needing to determine remuneration
arrangements at a fund as opposed to a ManCo level. Remuneration structures are
seldom disclosed in fund offer documents, and remuneration structures might be skewed
so managers participate in materialized returns but not in materialized losses. Some
respondents expressed their strong displeasure, with one continental European-based
asset manager adding: Remuneration is already covered under banking supervision
regulations. UCITS V will take that to a fund level and that is beyond what is acceptable.
Another frm commented on the potential for confusion between codes arising from CRD,
FSA and UCITS V: The multiplicity of remuneration codes is ludicrous we dont know
which one to apply.
UCITS VI is currently undergoing consultation and is closely linked to the shadow banking
review, ensuring equivalence of regulations, as well as a more conceptual section on
how to foster a culture of long-term investment in Europe. The issues at the center of
the consultation are the role of money market funds in the management of liquidity
for investors, their engagement in the securities lending and repo markets, and their
systemic involvement in the overall fnancial marketplace. Issues such as the various
methods for calculating the net asset value (NAV) for money market funds are also
addressed.
Sixty-three percent of respondents expressed concern at the potential for rolling back the
scope of eligibility to the level of UCITS III. One respondent commented: UCITS VI will
roll back all the fexibilities the industry gained after UCITS III and is seen as leapfrogging
because itll combined elements of AIFMD. The measures are getting progressively more
stringent. Another large continental European-headquartered frm added: UCITS VI is
the most important regulatory subject for us right now, because it will impact the use of
eligible assets, affect the calculation of leverage and alter the use of EPM.
UCITS V/VI changes are defnitely not
helpful, particularly the UCITS side
of depository liability; we are also
delaying investments in P/E in view
of the unforeseen consequences of
what might happen under AIFMD. We
demarcate both the banking and our
own regulatory register to show how
each executive can see demonstrable
processes in action.
Our biggest concern is that we cant
be AIFMD and MiFID authorized
simultaneously this is not a tracking
error. We are reliably informed that
we would have to revoke our MiFID
license and become an AIFM, and then
take up MiFID II measures in time. This
is out of all proportion as we only have
one alternative fund but we do have a
property team trying to launch other
funds. We simply may have to create a
new company for AIFMD, which is why
weve rated it a red priority.
Regulation was meant to be
enhancing investor protection but
custody in emerging markets is a point
in question under AIFMD. The latest
L2 guidance would require us to seek
a legal opinion per every jurisdiction
which would represent a prohibitive
cost. Its shortsighted because
restrictions will lead to too much risk
adversity and a widening funding gap
for pensions at the very time when the
industry needs wider diversifcation
across the asset base.
AIFMD is the biggest headache for us
in London. If we function as purely
an investment manager from our
London branch, the understanding is
that we can keep our authorization as
a MiFID frm, but if we are regarded
as the operator of the fund (i.e.,
providing transfer agency, pricing
or risk management), then we would
be classifed as an AIFM and lose our
ability to market to non-hedge funds
unless we set up a separate legal
entity to do so and convert a ManCo
into the AIFM.
Figure 13: Firms were positively disposed toward UCITS IV in comparison with the proposed
UCITS V and UCITS VI measures, with specifc concerns around liability and eligibility
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1
6

A
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D
)
New = New in 2012
The AIFMD measures remained controversial, with delays to the
Level 2 measures causing frms to question how the measures could
possibly be implemented before July 2013
European politicians were adamant that the industry should never again suffer the fallout
from the collapses of Lehman Brothers collapse and the Madoff scandal in late 2008 and
urged the European Commission to draw up the Alternative Investment Fund Managers
Directive (AIFMD) in some haste. The purpose was designed to cater all non-UCITS fund
activity a broad-brush defnition meant that hedge funds, private equity, real estate,
investment trusts, NURS, commodity, infrastructure and Spezialfonds were caught under
the scope of the measures.
Given that the measures were politically motivated, it is little surprise that the AIFMD
has mutated considerably since the proposal was published in April 2009. Subsequent
revisions have added new elements, such as remuneration, asset stripping and specifc
rules in relation to AIFMs managing EU and non-EU alternative investment funds (AIFs).
Measures are meant to take effect on 22 July 2013, and frms were able to gain sight of
only leaked versions of the L2 text. The comments recorded by the survey are shown in
Figure 14:
At least 73% of respondents (up from 69% in the prior year) would see challenges
with administering AIFs and/or AIFMs in third countries, such as offshore centers or
emerging markets, even against a backdrop of applying the four criteria for non-EU
jurisdictions.
6
6 The conditions listed in Art. 37.7(d)-(g) of the L1 text specify that an AIFM may only market shares/units of a non EU AIF to EU professional investors if:
a) Appropriate cooperation arrangements are in place between the competent authorities of the Member State of reference, the competent authorities of the home
Member State of the EU AIFs concerned and the supervisory authorities of the third country where the non-EU AIFM is established in order to ensure at least an
effcient exchange of information that allows the competent authorities to carry out their duties.
b) The third country where the non-EU AIFM is established is not listed as a non-cooperative country and territory by FATF requirements on money laundering and
terrorist fnancing.
c) The third country where the non-EU AIFM is established has signed an agreement with the Member State of reference, which fully complies with the standards
laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any
multilateral tax agreements.
d) The effective exercise by the competent authorities of their supervisory functions under this directive is neither prevented by the laws, regulations or
administrative provisions of a third country governing the AIFM, nor by limitations in the supervisory and investigatory powers of that third countrys supervisory
authorities.
Additionally, a non-EU AIFM intending to obtain prior authorization shall have a legal representative established in its Member State of Reference, the Member State
where it intends to develop effective marketing for most of those AIFs.

AIFMD will affect our real estate
business and our closed-ended funds
(which are similar to P/E). In France,
there are three different regulations
concerning what may/may not be
regulated, and it is not clear as to who
can be the AIF. Letter-box entities are
more of a problem in Luxembourg in
France, there is a soft limit from the
AMF saying that a frm is not allowed
to delegate more than 50%.
We are also concerned by the impact
of AIFMD on our real estate business
margins; we knew about the impact
on funds and REITs, but now we think
that partnerships and mergers might
be in scope too.
The letter-box entity provision under
AIFMD will impact our Irish business,
as would limits placed on leveraging.
Money market funds under UCITS VI
will also impact us signifcantly.
The letter-box delegation restrictions
are a real nuisance because we have
operations in 15 countries. It seems
that the more centers you service, the
greater the levels of complexity.
Many ManCos are already letter-
box entities, so if a frm want to
convert a ManCo into an AIFM, this
could present issues for some
frms, because combining ManCo
passporting with AIFMD means
rethinking operational structures.
Remuneration will be an issue under
AIFMD, but not such an issue for MiFID
frms.
We are impacted by the Volcker Rule
because it will impact our ability to
apply seed capital to our real estate
capital. The cost to us could be as
much as a 5%10% capital shortfall,
and we are skeptical of the amount of
collateral that can be transformed, so
we dont believe that frms will wish
to transact as much OTC derivative
volume.
Survey fndings
48% of respondents still had issues with prescriptive restrictions on leverage being
applied to their strategies, including some ETF providers or frms using EPM.
52% of respondents expressed concerns at remuneration measures needing to be
drawn up at a per-fund level, with caps applied and the approach extended to cover
UCITS V as well.
58% of respondents expressed concerns at the new letter-box entity provision if
a frm wanted to convert a ManCo into an AIFM, this could present issues for some
frms. One respondent commented: We understand the principle that the AIFM
should not delegate its functions to the extent that, in essence, it becomes a letter-
box entity. But we do have issues with the wording the totality of the individually
delegated tasks substantially exceeds the tasks remaining with the AIFM [Draft L2
Art. 83(d)] because we do not know the proportion that represents substantial.
Another frm added: The letter-box entity provisions under AIFMD are a major
headache and we are searching for the means to obtain an exemption. There is a soft
rule at the AMF that the proportionality should be 50% of activity, but activity is not
defned, so there are different interpretations PnL, results, AuM, etc.
Finally, 80% of respondents (down 2% from 2011) remained concerned that signifcant
running costs would arise from the need for depositaries to price in new liability-
related premium and capital charges and operational changes such as monitoring and
oversight functions, and these could be expected to be passed on to AIFs under L1
Art. 21. The restrictions in usage of certain valuers, or prime broker and sub-
custodian networks in foreign locations such as emerging or frontier markets, would
also have a negative impact on investor choice.
Many of the provisions will have more impact for asset servicers (typically custodian
banks) and prime brokers rather than asset managers. The following could be noted:

AIFMD features both an obligation of means (an obligation on the depositary to devote
appropriate resources and carry out appropriate due diligence so as to ensure safe-
keeping of assets) plus an obligation of result an obligation on the depositary to safe-
keep assets and to restitute them in case of loss). AIFMD would generate a growing liability
for custodians extensible into UCITS V, as both measures evolve into standard market
practice.
Given that the clients right of title to the assets must be protected at all times, the focus
would be on the loss of the asset in two senses fraud (where custodians typically
have b2b indemnifcation) and insolvencies (assets impaired for a period of time, then
returned to asset owners). If assets disappeared as part of the administration process
for example, the onus would be on the depository to replenish them with assets of similar
type or amount without undue delay. The possibility of an opt-out would not be a general
principle.
Many global custodians would not want to take liability of the prime brokers network
of agents and their choices of the same because otherwise they could be made liable
for the assets held with prime brokers. The AIF/PB/Depositary relationship would need
to be completely renegotiated in terms of tri-party contractual agreements, with new
arrangements between global custodians and prime brokers requiring re-papering of
contracts.
We use XXX as a clearing broker and
as an LDI frm, we are interested
in how the measures will translate
between the US and Europe. The FCM
model in the US makes it easier to
streamline documentation compared
with the bilateral DCM model in
Europe, but the LSOC model being
proposed has challenges if other client
assets are tapped when a member
defaults. We are not certain of the
value of the sell-side using pseudo-
prime capabilities as a collateral
transformation model either.
Derivative and counterparty clearing
documentation has been an important
priority. We approached several
banking clearers but it was clear that
the banks arent ready. Weve run
several beauty parades [on the basis
of the CDS spreads and settled on
XXX and YYY where we have a strong
relationship out of the big 5 dealers].
The lack of decent quality collateral
is a primary concern. We are doing
a lot of work around SBL, repo and
collateral because we are worried
about the position of the banks, and
the amount of collateral shortfall
runs into the trillions of dollars. The
migration CNAV into VNAV funds
will be a drive to do more repos but
we cant stick collateral onto just
counterparty we have to spread the
risk.
We strongly support the idea of FMIs
providing assistance with collateral
management services. Collateral
is becoming expensive because
of structural diffculties with the
Eurozone. There are huge variations
of creditworthiness across the sector.
We predict collateral shortages to
come but would only tap into select
collateral sources say Hong Kong/
Singapore.
Figure 14: Firms remained concerned regarding AIFMD with new concerns around liability
and the proportionality around letterbox entities
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0
New = New in 2012
The proposed rules on clearing and reporting of trades OTC
derivatives in Europe (called EMIR) remained controversial; there is an
urgent need to reinvigorate collateral provision
The Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) is now in the
fnal stages of development, with SEC and CFTC rulemakings well under way. Dodd-Frank
Title VII requires all fnancial entities to centrally clear swap trades (as well as non-
fnancial entities using swaps that do not hedge commercial risk), including swap dealers
or major swap participants, commodity pools, private investment funds, employee
beneft plans, and persons predominantly engaged in activities that are in the business of
banking, or in activities that are fnancial in nature.
The scope of the European Market Infrastructure Regulation (EMIR) is comparable to
Dodd-Frank Title VII. The regulations focus on central clearing, counterparties and the
requirement to report to a central repository. The aim of the regulation is to increase
transparency in the derivatives market and to reduce counterparty exposure. All
standardized derivative trades will be centrally cleared at a CCP, removing exposure for
the asset manager to the counterparty. A key requirement is for asset manager frms to
select supporting clearing brokers who will act as a conduit to the CCPs. The measures
are at an advanced stage, with technical standards defned in document 2012_600 as of
27 September 2012.
Ultimately, the scope and requirements of DF and EMIR/MIFID are expected to align, but
similarities and differences should be noted, such as:
Similarities: On-exchange trading; resort to electronic platforms (called SEFs in the
US or MTFs/OTFs in Europe depending on the thresholds); clearing via CCPs; capital
provisions behind the same; use of trade repositories; and position limits applied
Differences: The US will be adopting an agency-style futures clearing model (FCM)
while Europe opts for a principal derivative clearing model (DCM). Different carve-
outs (broadly CLS-cleared FX and corporates using OTC derivatives for hedging
only as part of their normal commercial activities in the US vs. pension funds and
occupational pension schemes in Europe); use of regulatory colleges in Europe; lack
of the Volcker and Swaps Push-out Rules 619 & 716 equivalent in Europe; and
potential resort to central bank support in Europe.
We outsource collateral management
to XXX and are supportive towards
industry moves to standardize the
supply of quality collateral from
elsewhere provided that both costs
and benefts are attractive. We
absolutely need to draw on collateral
outside the Eurozone.
Collateral management is a major
issue for our fnance group. Some
asset managers in France deal directly
or through dedicated entities on the
market. Asset managers have to
provision twice the collateral amount
and we have to model to reduce CpR
to offset liabilities and receivables.
The frm might be supportive of more
FMI entities to bring collateral from
the regions. We are happy to see
developments of that nature but we
are on our guard against monopolies
developing.
A collateral superhighway sounds
like a good idea, although you need
to check how effective it will be
with colleagues from operations.
The collateral pool of cash and
government bonds is shrinking,
but if too many players besides
Euroclear and Clearstream develop
this functionality, youll end up with
collateral back roads.
We developed a standardized
approach showing portfolio values
with/without LIBORGate.
Last year, we launched a physical
replication ETF with a great deal of
publicity. Our principle was safety
frst. The frm is also taking a
careful look at money market funds,
particularly those denominated in
euros to assess their viability if the
ECB makes further cuts in interest
rates.
Survey fndings
Responses varied from 2011 in terms of how frms were anticipating EMIR (see
Figure 15):
77% of respondents were concerned about the potential for extraterritorial
complications, including the rendition of data surrounding US persons to the CFTC
per 722 and the SEC per 772, data indemnifcations per 728, privacy laws in
some EU countries, and establishment of recognition for substituted compliance
in Europe.
29% of respondents expected to handle a greater volume of OTC derivatives
(compared with 28% in 2011), but 70% of respondents (compared with 64% in 2011)
reckoned that the impact on costs for the buy-side post-EMIR would be infationary
as in, increase by at least 20%. These cost increases were foreseen as direct (the
result of extra charges in initial and variation margin being passed back by the sell-
side) and indirect (arising from collateral no longer as available for offsets) or as a
result of asset selection away from illiquid/intransparent instruments.
58% of respondents expressed concerns about potential scarcity in quality collateral,
caused by structural, Eurozone or future regulatory constraints (such as shadow
banking resolution). Forty-four percent of frms expressed their support behind the
notion of providing more collateral, facilitating collateral upgrades and collateral
transformation. There was a degree of support and confdence behind FMIs
undertaking to conduct this function, particularly if collateral could be brought in
from other regions.
46% of respondents anticipated signifcant issues pricing collateral to support
initial/variation margin (IM/VM) calls, and 36% indicated that they had conducted a
counterparty risk analysis or a beauty parade to test broker fees and assess their
suitability for converting assets into other forms of collateral over the last year. This
latter recourse was in lieu of CCPs accepting a wider range of non-cash assets for VM
and precluded asset managers from needing to hold more cash (performance drag).
67% of respondents reckoned that OTC Clearing would increase requirements for
intra-day data (up from 60% in 2011), and 68% of respondents reckoned that trying to
get standardized legal entity documentation would be one of their biggest challenges
(up from 63% in 2011).
Figure 15: Respondents expressed views about the upsides and downsides of new OTC
derivatives measures under Dodd-Frank and EMIR, with collateral a specifc focus
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Unintended
effects
Positive on
transparency
Concerns at costs of collateral
and operational risk
We expect to see more frms offering
ETFs because the AuM is still small
compared to UCITS (<5%) and because
the market is not yet saturated by
product offerings. ETFs will remain
cheaper relative to alternative
investment types, therefore remaining
attractive; however, the cost of the
running an ETF will increase if stock
lending fees are to be totally returned
to the funds.
Were buoyant on the prospects for
ETFs. The survey results from SSgA/
Citywire suggested that 55% of global
fund selectors plan to increase their
allocation to ETFs over the next three
years.
Active ETFs have a very bright future
in some form provided that they
are not selectively overregulated;
depending on the defnition of active,
the market share could easily reach
the 5%-10% level by fve years time.
With wider IFA adoption, we could
see the institutional-to-retail balance
[of IFAs] tipping to nearer 70%/75%
to 30%/25% after fve years from the
current 90% institutional level.
The frm is not a big user of ETFs bar
some equity and fund of fund ETFs.
The sense is that there is a diffcult
balance of low-cost/high-cost; that
ETFs could cannibalize our existing
fund range and damage the back
book while the FoF ETF might be
complementary.
We are going to see a desire on
the part of the FSA to futurize and
standardize both OTC and ETF
instruments. Correct taxonomies are
going to be key.
It would be diffcult to classify
synthetic ETFs as physical/synthetic
or non-complex/complex products
as many products are hybrid (e.g.,
swapping out exposures).
The possible future effects of regulation cast a shadow on the further
evolution and uptake of exchange-traded funds (ETFs)
In their original discussion paper (DP) 2011_220, ESMA highlighted a number of broader
issues that arose in the context of exchange-traded funds and UCITS using more complex
investment techniques or structures, particularly concerning the so-called retailization
of complex products. Since then, ESMA has published a suite of further papers, and it
was clear from the 2012 survey that there was some confusion as to how ETFs might be
regulated in future 53% of respondents were concerned about the impact of the ESMA
measures on the ETF/SBL markets (see Figure 16). At present, retail investors in Europe
represent 15% of ETF usage, but this fgure is unlikely to exceed 25% of the market unless
the concerns of product providers and investors are addressed.
The ESMA Report and Consultation Paper 2012_474 issued July 2012 clarifed several
areas of relative uncertainty as follows:
ESMA decided not to require distinction between physical and synthetic UCITS
ETFs,
7
arguing that it felt that this requirement was diffcult in practice and would not
address mixed situations where the replication is partially physical and synthetic.
ESMAs guidelines called for UCITS and ETFs that entered into effcient portfolio
management (EPM) techniques (e.g., securities lending) to ensure that investors were
clearly informed of these activities and the related risks. ESMA would require the full
disclosure of the calculation methodologies for fnancial indices, which would allow
investors to replicate the performance of an index.
ESMA decided that collateral that is taken into the UCITS fund or ETF from trades or
via EPM techniques must comply with strict criteria. One of the specifc changes is to
limit the amount of collateral that can be accepted from a single counterparty to just
20% in order to limit counterparty risk.
ESMAs guidelines called for all the revenues generated by securities lending activities
net of operating costs to be returned in full to the fund (rather than the ETF
manager retaining part for themselves).
ESMA decided that when a fund had put securities out for securities lending
arrangements, it should be able to recall these securities at any time (with a further
consultation due for arrangements involving repo or reverse repo).
Finally, ESMA expressed the view that the risks of conficts of interests should be
limited by prohibiting entities from the same group from acting at the same time as
the ETF provider and the derivative counterparty.
Generally, results from the survey demarcated between frms who were generally sure
that they had an interest in offering or investing in ETFs and other frms that were either
unsure or uninterested (24% of respondents). A minority of respondents from the former
group were supportive of taxonomies for instance, 19% of frms were positive on ETFs
being classifed as either physical or synthetic, 13% were positive if ETFs (in particular
synthetic) were classifed as complex products, and 16% were positive if restrictions were
imposed on certain products sold to retail clients. Forty-four percent of respondents were
positive to the need for greater disclosure to investors being imposed by regulators on
securities lending policies. In general, the sentiment seemed to be that greater disclosure
requirements would lead to the better understanding of the products and will probably
aid retail infows.
7 ESMA did, however, believe it important to distinguish between index-tracking ETFs and other ETFs, such as leveraged ETFs and active ETFs, with less
clear and more complex investment objectives. ESMA also believed that issues around UCITS ETFs should not be treated differently from other UCITS, and more
importantly, from other exchange-traded products (ETPs) such as notes and certifcates that are distributed to retail investors, in order to avoid the creation of
regulatory loopholes and to establish a level playing feld between similar products.
We are not comfortable with the
ESMA guidelines applying to EPM
techniques (which doesnt just affect
ETFs but UCITS as well). The reason
for this is 1) the heavy cost to manage
the funding of the collateral and 2) all
the lending revenues go to the funds.
The fact that long-term repos must be
callable at any time breaks structured
funds, causing a real issue for us.
We are most concerned by the
suggestion in the ESMA 2012_474
paper that all the revenues generated
through securities lending, net of
operating costs, should be returned
to the fund when a UCITS or ETF
engages in securities lending. This
will be a signifcant change for us,
because we stand to lose up to 40% of
our securities lending revenues if this
happens.
MiFID II will usher in disclosure of ETF
trading through pre- and post-trade
transparency measures, which will do
much to assist confdence of investors
in this market and therefore liquidity
behind different styles of ETFs, such
as Strategy or Asset Allocation ETFs.
There has been an expansion of
over 10% in terms of the number of
resources dedicated to compliance
and the reg reform team. But we
havent taken on new professionals;
more redeployed people from the
business.
We are looking for individuals who
have legal backgrounds because
the learning curve is less for them
to hit the ground running with new
regulations. That said, the takeaway
is that we need to be staffng up
with many more individuals who
understand how particular regulators
think, not just individuals who know
about regulations per se.
Survey fndings
Figure 16: Issues polarizing frms offering or investing in ETFs
R
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22%
Respondents posed some key business questions.
Would ETFs remain cheaper relative to alternative investment types, therefore becoming
more attractive to retail investors (on the basis of brand loyalty and who distributes
whose product in Europe)? Would there be a race to the bottom on fees, and might that
only beneft the larger-scale providers? Might synthetic products become cheaper and
hence more attractive, or become shunned by risk-averse investors? Might the fear of
regulation hinder the rate of innovation in the industry and deter product launches in
Europe?
Respondents also posed important and specifc regulatory questions. Would running
costs increase, given additional disclosure requirements from both ESMA and UCITS
KIIDs, and given that stock lending fees would need to be fully returned to the fund?
Would the ESMA approach require fuller disclosure vs. the UCITS KIID approach, which
restricts information to a two-page document? Would UCITS VI restrict the boundaries of
ETFs, making them less fexible? Would MiFID II boost the disclosure of ETF trading, thus
addressing the liquidity concerns expressed by 22% of respondents?
There was a strong focus on ensuring that the compliance team had
the appropriate levels of resources to get the job done; many frms
expressed interest in where their peer groups were heading
The number of FTEs had been an area of consistent interest in every annual compliance
survey, but 2012s results showed a signifcant departure, with several frms keen to
understand precisely how they compared against their peers. Given that the resourcing
can vary signifcantly according to factors such as AuM, geographic scope, product
scope, ownership and investment style, precise rules were diffcult to come by.
The situation was made more complex by the fact that frms defne the compliance
function rather differently, with varying levels of contribution from functions such as
compliance monitoring, guideline monitoring, screening/alerts, KYC/client onboarding,
product and business development marketing, risk management, legal, fnance, internal
audit, branch monitoring, AML/sanctions/fraud, special investigations, whistle-blowing
and regulatory reform. For example, many banking or insurance-owned entities might
leverage their parent function to carry out regulatory reform activity on behalf of each
entity in the group, while several other frms double-hatted the function.
There are positives and negatives
in hiring compliance resources with
a regulatory background. On the
positive side, they know the ropes
and how the regulators think and act.
On the negative side, some of these
individuals are rigid and not versed
with investment products so do not
connect with the portfolio managers
or dealing desk.
The compliance team is 70-strong
globally and we get a lot of pressure
from the business on costs. Our
justifcation is that there is massive
regulatory pressure across 9-10
locations; 30%-40% of the resources
are used to cover pension fund
(guideline) monitoring.
The team size is 15 and the headcount
fat. Compliance monitoring and ABC
is handled by us, but AML and testing/
monitoring of portfolio guidelines is
handled by the business.
Compliance and guideline monitoring
are not within the remit of compliance
as such. We carry out screening/alerts,
KYC, client onboarding, fnancial
processes, product development,
marketing/communications and
special investigations, but we are
totally missing mandate adherence
which is a signifcant weakness.
Compliance for real estate is a
challenge as the skill-sets, analysis
and commitment are very different
from, say, equities. The toolbox is not
optimized and we have to put a lot of
effort and time into making it work as
this is compulsory in Germany.
Were rolling out CoI CBT under the
umbrella of our annual compliance
training. This years focus is on
fnancial crime and insider dealing,
and how best to adjust per the various
Eurozone scenarios, e.g., when to cut-
over to a hot standby custodian.
Weve expanded the size of the team
by at least 10% over the last year and
fnd that individuals who have the
right knowledge of both current and
future regulations who can face up
to the business are very hard to fnd.
Regulatory reform is a much-sought
after skill-set.
Figure 17 shows how investment in both compliance professionals and compliance
automation systems changed since the prior survey, with the illustration on the right
showing the decomposition in terms of both tenure and regulatory experience:
Figure 17: Analysis of compliance resources and systems
50%
100%
75%
0%
25%
50 10 20 30 40 60
20%
60%
40%
0%
P
e
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%

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50 10 20 30 40 60
30%
20%
0%
%

I
T

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>
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30%
20%
0%
10%
*Local
70 70 80 80
*Local
*via banking parent
*Local
Median headcount growth: about 8%
Median systems growth: about 5%
Median tenure of over ve years: about 50%
Median % competent auth. experience: about 8%
Size of EMEA compliance team Size of EMEA compliance team
The results show that:
48% of frms indicated that their team sizes grew in 2012, compared with 42%
in 2011. The remaining frms were fat in terms of headcount and borrowed
temporary help from other divisions/externally. In the case of one frm, the team size
shrank because of a signifcant fall in AuM (not shown on chart).
The rate of investing in compliance FTEs ran at close to double the rate of investing
in systems dedicated to compliance. An average of around 8% was recorded for the
trend in headcount for 2012 vs. 2011.
The trend in headcount stayed fat for several frms but also grew at between 10%
and 25% for several frms too. As the non-correlation in team size shows, this wasnt
merely a feature of smaller teams (or alternative asset managers as it happens).
Hiring compliance professionals who had worked within a regulator environment was
seen as a bonus by some and a downside by others. One respondent commented:
There are positives and negatives in hiring compliance resources with a regulatory
background. On the positive side, they know the ropes and how the regulators think
and act. On the negative side, some of these individuals are rigid and not versed with
investment products so do not connect with the portfolio managers or dealing desk.
The relative priorities for how compliance spent its time is shown in Figure 18:
Figure 18: What are the relative priorities for compliance in terms of time spent per type of
activity (left) and per themed area (right)
Front ofce - MADII SSR
Policies and procedures
Compliance monitoring
Training and induction
Internal remediation/mitigation
Sanctions/AML/ABC
Internal audit
Regulatory affairs (e.g., new regs)
Prudential issues (e.g., ICAAP)
Regulatory thematic (ARROW/ICAAP, 166, etc.)
Management of risk
General advisory/client contact
Mandate risk and governance
Front ofce (e.g., MiFID II)
Disclosure/trade reporting
Inducements
Sanctions/AML/ABC
Client assets
Dodd-Frank or EMIR
RDR/PRIPs preparations
UCITS IV/V/VI and AIFMD
FATCA
ICAAP/Liquidity/Solvency II
Management of risk
9.5%
7.5%
5.6%
9.2%
9.8%
7.3%
9.5%
8.0%
9.0%
11.5%
11.1%
7.1%
7.0%
4.8%
4.3%
9.9%
11.3%
9.5%
9.5%
10.3%
8.3%
7.0%
7.2%
6.0%
Survey fndings
Many of the compliance team are legal
or regulatory by background - weve
seen people move from the business
into compliance, but we havent seen
the reverse.
We are looking at both off-the-shelf
systems but we are not shy about
building up internal systems as well.
We did this for incident management,
regulatory risk monitoring and
managing conficts of interest,
because we couldnt fnd anything
suitable among the vendor solutions in
this area.
Our parent has invested very heavily
in systems over the last year at least
30+% increase in spend. The focus
has been on compliance monitoring
dashboards rather than forensics on
AML or market abuse, which are low
risk to us.
Compliance monitoring is a huge
focus. We have a compliance
dashboard which features the
monitoring of portfolio compliance/
guidelines, marketing compliance and
regulatory compliance on a per-fund
and per-country basis.
Forensics are a huge focus for this
frm right now, and weve installed
new systems to support short selling,
market abuse and fnancial crime.
The small changes to priorities were recorded as follows:
The amount of time spent on regulatory affairs remained level at just over 11%,
while the time spent on ARROW visits, ICAAPs and other prudential issues held up at
16.5%, both comparable with the fgures recorded in the 2011 survey.
Perhaps unsurprisingly given the strong regulatory focus on short selling, market
abuse prevention, MiFID II, and Dodd-Frank SEF functionality, the amount of time
allocated to front offce issues rose to over 19%, an increase of increase of 2
percentage points from 2011.
The portion of time dedicated to training increased appreciably from just over 5% in
2011 to 7% in 2012.
There was a wide disparity in the ftness of purpose of systems, with
notable defcits in terms of handling change requests and (especially)
permissioning of compliance data
The 2012 results were strongly polarized between frms whose systems, controls and
data were broadly ft for purpose and others that were clearly struggling under multiple
business and regulatory changes. There was no particular pattern of behavior for
example, it was not always an advantage to have a large banking or insurance group as
a parent, nor was it particularly guaranteed that a large AuM base would automatically
translate into having access to the best systems money could buy.
Small was sometimes beautiful, particularly for some of the high-performing hedge funds,
and frms carrying multiple business lines (such as equities, fxed income, multi-asset,
alternatives and property), multiple investment styles or servicing multiple geographies
had to work hard to keep up with frms running simpler lines of business.
The results from the respondents are recorded below for ready comparison. A 100%
fgure on the spider-chart indicates that all respondents were able to claim that their frm
satisfed the particular condition (see Figure 19):
Figure 19: Summary of system and data issues recorded in the 2012 survey
1. Systems and management information(MI) are robust and t for purpose
2. Firmnot experiencing signicantissues with exibility/ITchange requests
3. Invested/ingin forensic systems in order to highlight suspicions
4. Dashboard diagnostic tool in use that can monitor compliance risk management
5. Guideline monitoringto support compliancestrategies
6. Audit trails email/Tradebook/other indicators
7. Record retention services useful, particularly to reducedocumentationrisk and legal risk
8. KCIs are recorded and socializedwithin the rm
9. Data standards for KCIs (andKPIs/KRIs and loss data handling) useful
10. Data taxonomy in place to help managethe most out of thedata
11. Newreference data installations via UII, LEI or internal datawarehouses
12. Data quality to support compliancestrategies
13. Data availability to support compliancestrategies
14. Data permissioning handled/division (who keeps what data)
Systems
Records Standards
Quality
73%
34%
42%
32%
51%
85%
95%
72%
88%
40%
47%
47%
42%
20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
2
3
4
5
6
7
8
9
10
11
12
13
14

The following points are worth noting:
73% of frms maintained that their systems and MI were robust and broadly ft for
purpose a slight reduction on the 75% fgure recorded in 2011. The percentage
of frms that argued that they were experiencing signifcant issues with system
fexibility/IT change requests was 66% (up from 61% in 2011).
Only 32% of frms identifed that they had a dashboard tool to help compliance
monitor the appropriate MI effectively.
The ratings for recording audit trails and client records were both highly satisfactory
(85% and 95% of respondents, respectively). This shows a marked improvement from
2011. The recording of mobile telephone conversations remained an issue for several
frms, however.
Support for data standards such as key performance indicators (KPIs) such as key
risk indicators (KRIs) and key compliance indicators (KCIs) remained very high (88%),
but only 72% of respondents were able to certify that these were socialized within the
frm.
Possibly as a result of improvements to data taxonomies brought about by frms
preparing for Solvency II and FATCA, the percentage of frms that claimed that they
possessed an effective taxonomy (e.g., for recording instrument and legal entity data)
climbed to 40% (from 35% in 2011).
The above fgures correlated well with frms evidencing good data governance and
operating data warehouses, particularly for the beneft of the compliance team. There
is an opportunity for more outsourcing agents to improve their level of provisioning in
this area.
Most asset managers maintained a large suite of KPIs/KRIs/KCIs. Examples of useful KCIs
recorded in the 2012 survey are reproduced below:
Business/management data (e.g., escalations, actions, sign-offs, permissions, approvals,
changes to approvals, write-offs, volumes, numbers, costs, ROCE, trends, remuneration
data, deferrals, de minimis exceptions, clawback data, LTIP data)
Mandate data (e.g., sector/market sensitivity/position limit breaches, tracking error,
mandate breaches and country risk downgrades, IMA breaches, changes to mandates,
fund legal entity data, SAA/TAA, risk parity, liquidity risk tracking, specifc client
instructions)
Compliance data authorizations, control failures, remediations, SARs and PEPs, OBIs,
investigations, market abuses, market concerns, concentration risks, basis and wrong-way
risk data, reverse stress testing data, other performance data (e.g., ALM data, TCF data,
SRRI)
Operational data (e.g., order aggregations, allocations, institutional and nominee data,
fund structure (parent/child) data, errors and omissions including descriptions, discovery
dates, frequency of occurrences, resolution dates, recoveries, responsibles), near-misses
(against the frm/in the frms favor), trading losses, material incidents, exceptions,
reconciliations, stock lending, collateral management, corporate actions, tax reclaims,
proxy voting)
Customer service data (e.g., legal entity data, taxpayer identifcation number (TIN),
taxpayer account data including balances, customer personal indicia, referrals, customer
complaints, customer compensations, contact frequency, waiting calls, missed calls, other
TCF outcomes data)
The avalanche of regulatory measures across the EU as well as the
US is contributing to severe regulatory fatigue. Given the potential for
accidents and mis-selling, this will continue to be a persistent theme
over the next fve years
The prior years survey showed how there was no let-up in the pace, volume and intensity
of changes to regulations in Europe as well as under the Dodd-Frank measures in the
US. This survey, however, departed in important ways from 2011 survey, which featured
cross-jurisdictional complexities, macro-factors such as G20 and changes to local
regulators (e.g., bifurcation of the FSA into PRA/FCA or the AMF into ACP/AMF) as the
top three drivers, respectively.
The priorities for the forthcoming three to fve years for compliance departments is
illustrated in Figure 20:
As in the case of the prior survey, the top three challenges remained the same:
1. Managing the increased cross-jurisdictional complexities arising from multiple
varying or competing measures, either between the US and EU, or between regional
and local measures. One global traditional manager was commenting that There is a
trade war between the EU and the US in terms of escalating mutual non-recognition,
with a policy breakdown between the two regions. This means two regulatory
avalanches to cope with during the coming years, not coordinated at the policy level.
Weve run some auxiliary projects
around databases and ensuring that
our systems can communicate with
each other. We are building in more
electronic restrictions and permissions
into our systems.
We are going through the processes
to identify the issues around EMIR and
we discovered a few issues with LEIs
as we operate a pool structure global
SICAV; we understand that there is no
industry standard for transacting at a
pool level.
One of the biggest system challenges
was to accommodate moves to near-
zero (or even negative) interest rates.
We have reason to invest in upstream
data because we have US and
Canadian clients which demand a
deeper intensity of data recovery and
which expose the frm to subpoenas.
Weve looked carefully at whether
to centralize or decentralize our
data management to build in better
future-proofng and to strengthen our
responsiveness with regard to either
client requests or regulatory.
Quality of data is a real issue. We fnd
that the prime brokers that we use are
not throwing us the corporate actions
and rights issues data as quickly, and
essential information such as ISINs
and country code data is sometimes
missing or needs rechecking. This is a
real problem as some countries need
disclosure of the trades by T+1.
We have a data warehouse here but
we havent got the data right and
there are gaps in the data despite
having an OK taxonomy and KCIs. For
example, we pointed out two different
fgures quoted in our fnancial
promotions.
Survey fndings
2. Macro-factors such as Dodd-Frank and the G20 would become more infuential,
with respondents particularly sensitive to the future extraterritorial implications of
Dodd-Frank and the expanded scope for the treatment of a US person under the
new CFTC rulemaking. The wider environmental impacts (processes for rapid and
effective response to regulatory/legislative change) also featured more heavily within
the context of ARROW and also in terms of future-facing.
3. Changes to the local regulators (e.g., FSA into FCA/PRA or AMF into AMF/
ACP). Several respondents expressed a great deal of concern about how these new
bodies might exercise their new powers, concerning authorization, enforcement
and intervention. Firms cited adjusting to different sets of supervisors with different
objectives/risk tolerance levels, rule books and new behaviors, including earlier
intervention and increased information requests/intrusion. A specifc concern
for the UK was a growing awareness that approved persons also face increased
personal liabilities and reputational impacts (e.g., fnes, adverse publicity or even
disqualifcation) for regulatory breaches that occur on their watch.
A further consideration cited by respondents concerned the potential for low-probability,
high-impact losses such as the extreme risk of redenomination in the Eurozone the
unpredictable effects arising as the politicians, central banks and the markets determine
the macroeconomic position of particular countries. These risks would primarily
be manifested as new market, counterparty credit and operational risks but also
concentration and correlation risks.
One global traditional manager commented that Weve performed a complete
emergency redenomination scenario assessment per risks arising as a result of Greece
exiting the euro and adopting its own currency resulting in huge market fuctuations.
The focus has been on a number of factors such as determining counterparty risk
exposures, reducing exposures to OTC derivatives, assessing collateralized exposures and
performing modeling of the stability of banks moving cash in the Eurozone. Weve also
conducted a review of the legal jurisdictions for the Eurozone countries at risk.
A further consideration concerned the notion of horizon risk, linked to scenario
modeling and regulatory risk in particular. Forty-fve percent of frms were already
specifcally confguring or operating specifc regulatory reform program management
offce (PMO) functions (or leveraging their parent to do so), sharply up from 19% in 2011
and 8% in 2010. Respondents sharply differed in terms of the remit of such a function,
with responsibilities ranging from regulatory monitoring through to lobbying, strategy,
business development and product development.
Data management is defnitely a
senior management issue in view
of the threats to our business on
the horizon coming from multiple
regulatory change requests.
Weve invested behind both data
classifcation [taxonomy] and data
storage standards, behind discovery
tools, and started looking at cloud
computing to address any fractures in
the way that data is stored/recalled.
Weve performed an assessment
to determine how Eurozone
redenomination will impact our ability
to execute KYC, AML and transaction
monitoring. Weve scoped the extra
work required to fully update systems
to include the additional currency and
instruments.
The sheer number of regulations
in the pipeline with wholly binary
implications for business models is
one of the primary items likely to keep
me awake at night. The complexity of
the regulations to come is making it a
hard environment for compliance to
be business-facilitative.
Weve performed a complete
emergency redenomination scenario
assessment. The focus has been
on a number of factors such as
determining counterparty risk
exposures, reducing exposures to OTC
derivatives, assessing collateralized
exposures and performing modeling of
the stability of banks moving cash in
the Eurozone. Weve also conducted a
review of the legal jurisdictions for the
Eurozone countries at risk.
Extraterritorial worry is the number
one risk moving forward. We are also
looking to increase the number of
distribution channels overseas with
natural countries which increases the
number of issues to be managed.
One asset managers response was typical: I am not optimistic that there will be lots of
new products or solutions over the next few years because the regulators arent listening.
That said, weve just hired a new Head of Regulatory Affairs so we can keep track of the
new measures as they appear on the radar. Another added a comment on the challenge
of occupying the hot seat of regulatory reform: The sheer number of regulations in the
pipeline with wholly binary implications for business models is one of the primary items
likely to keep me awake at night. The complexity of the regulations to come is making it a
hard environment for compliance to be business-facilitative.
Figure 20: The future of compliance management
0
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There is a trade war between the
EU and the US in terms of escalating
mutual nonrecognition, with a policy
breakdown between the two regions.
This means two regulatory avalanches
to cope with during the coming years,
not coordinated at the policy level.
RDR will throw the industry into
confusion as to what to do per each
type of share class. As 99% of our
funds are distributed via platforms,
we remain concerned at the trend
which forces us away from customers
through the increased use of
platforms.
As the FSA becomes the FCA, we
expect the new regulatory body to be
more like IMRO. Their actions will be
more confrontational prove to us
what you are doing and specifcally
what is compliance doing?
The FCA are shortly about to issue
their footprint for consumers which
will focus on the potential to avoid CoI.
We are concentrating on doing the
right thing in relation to ensuring good
governance, boosting our compliance
training, streamlining issue escalation
and, above all, importing/applying the
CoE from our US parent.
We consider Eurozone risk to be a
fnancial risk and weve looked at
various scenarios. We have weekly
meetings to discuss the position and
have run OpR workshops internally,
looking at factors such as changes
to country indications or bank credit
rating. Weve compiled lists such as the
status of open accounts and the list of
products impacted, and we involved
our custodians in this process. We also
defned the bandwidth of replacing
collateral with US or Australian
government bonds and explored the
legal basis of our client mandates
to ensure that we avoid any breach
situation from developing.
Summary of fndings 2012 (42 frms) vs. 2011
This is a summary of the fndings from the 2012 survey in comparison to the previous years survey in order to illustrate the trends
under way:
Comparison of the results from risk management for asset managers
Indicator 2012 2011 Delta/comments
Managing compliance
across BUs (one
compliance culture and
star/no star culture)
78% vs. 26%/36% 76% vs.
23%/39%
The impacts of GRR and the formalism of the CCO function motivating frms to
be more consistent and joined up to avoid reputational events such as fnes or
potential for class actions; growing evidence of PM footprint with new strategies
Firms with a GRR team
or division looking at new
regulations
45% as dedicated unit or
team (including at parent
level)
19% at frm level only Even greater focus on cross-regulatory impacts and impact of regulations on
business and operating models, plus lobbying; GRR sometimes carved out of
mainstream compliance/legal
Focus on inducements,
commissions and
retrocessions
42% 38% Uncertainty remains compared with 2011 given DOT of MiFID II despite the
impacts of RDR in UK and Provisieverbod in the Netherlands
Focus on management,
governance and culture on
the ARROW or ICAAP
79% 79% Similar percentage but ostensibly more regulatory focus on behaviors resulting
in queries how to measure/manage this
Range of the ICG results
from the survey expressed
against the larger of PI
or PII
130%-170%
Up to 500%
120%-160%
Up to 300%
Increased infation in scores; evidence of greater levels of documentation
needing to be produced and higher unwinds
Challenges with
introducing depository
insurance to cover
liabilities per UCITS V
50% 45% Extension of AIFMD liability regime to UCITS V without scope for
a depositary to contract a discharge of liability
Issues with the defnition
of substantial in regards
to letter-box Draft L2 text
of AIFMD
58% 0% Appearance of this proportional measure has created consternation among a
majority of asset managers
Firms expecting OTCD
costs to go up and frms
expecting to trade more
volumes
70% vs. 29% 64% vs. 28% Greater expection that costs of processing/collateral set to go up with similar
sentiments from larger frms trading more
Firm is worried about
extraterritorial measures
being applied outside US
for OTCDs
77% 72% Growing concerns regarding the SEC/CFTC defnitions of a US person, reporting
specifc OTC data and privacy impacts
Average time spent on
RDR and PRIPs
7.3% 6.8% Not surprisingly, this fgure has increased in the UK given the FSAs January
2013 deadline
Average time spent on
UCITS, AIFMD, Dodd-Frank/
EMIR and FATCA (newer
regulations)
30% 30% The cumulative time spent on these measures has remained stable, but the focus
on UCITS IV/V and AIFMD and, to some degree, Dodd-Frank has squeezed
FATCA
Average time dedicated to
training
7.0% 5.2% Greater recognition of the importance of training, partly out of necessity and
partly to educate business colleagues given fnes
IMs with data, systems and
MI robust/ft for purpose
73% 75% Slight deterioration; some systems challenged to deliver; constant change
requests from regulations and client requests
Firms not experiencing
signifcant issues with
fexibility/IT change
requests
34% 39% Deterioration in performance for frms faced with multiple client-driven or
regulatory change requests
Key:
Green = results showing improvements
Gray = comparable results
Yellow = results indicating greater challenges
Red = results showing signifcant challenges/deterioration
Defnitions of themed regulatory measures
Regulatory measure Defnition
Undertakings in
Collective Instruments
and Investment Trusts
(UCITS IV/v/VI)
Directive 2009/65/EC clarifed defnitions relating to (among others): transferable securities, money market instruments, derivatives and embedded derivatives, fnancial
indices, index-replicating UCITS and effcient portfolio management schemes. Additionally UCITS IV contained provisions for new areas such as the extension of the
Management Company Passport, a new Key Investor Information Document (KIID) to replace the simplifed prospectus, clarity around the creation of master/feeder
structures and information concerning pooling provisions. UCITS IV was Implemented in July 2011 and UCITS V is due to be implemented after Q3 2015.
Alternative Investment
Directive for Fund
Managers (AIFMD)
2011/61/EU
Directive 2011/61/EU aims to: 1) Establish a secure and harmonized EU framework for monitoring and supervising the risks that AIFMs pose to their investors,
counterparties, other fnancial market participants and to fnancial stability and 2) Subject to compliance with strict requirements, permit AIFMs to provide services and
market their funds across the internal market. Managers of all non-UCITS funds require authorization under the directive. AIFMs will be permitted to manage and market
AIFs domiciled in third countries. At the time of writing there were several draft versions of the Level 2 text in circulation, culminating in Level 2 measures issued in
December 2012. The earliest date for the AIFMD to take effect is July 2013.
European Market
Infrastructure
Regulation (EMIR)
648/2012
A consultation on measures by the European Commission to improve the derivatives markets and reduce risks to fnancial stability. The scope currently includes
instruments such as IRSs, CDSs, equity derivatives, total return swaps and FX forwards. It outlines possible measures to reduce risks in the derivatives markets. These
include; standardization, central data repository, CCP clearing and on-exchange execution, with counterparty credit risk and clearing safety and soundness as two
particular areas of focus. The US has implemented the Dodd-Frank Title VII measures (Rules 701-774) with detailed rulemaking for swaps and securities-based swaps via
the CFTC and SEC, respectively. The effective date for entry into force for EMIR was 16 August 2012.
Foreign Account
Tax Compliance Act
(FATCA)
IRS Notice 2011-3 provides the Chief Compliance Offcer or another responsible offcer of a foreign fnancial institution (FFO) must certify to the IRS as to the completion
of certain customer identifcation procedures related to the identifcation of pre-existing accounts as US accounts (per published US indicia). IRS Notice 2011-53 issued
phased-in timelines for implementation by participating FFls to implement the requirements on account identifcation, information reporting and withholding. An FFI must
now enter into an agreement with the IRS by 30 June 2013 to ensure that it will be identifed as a participating FFI in time to allow withholding agents to verify that no
withholding is required.
Capital Requirements
Directive (CRD III and
CRD IV)
In the wake of the fnancial crisis, the G20 decided international capital and liquidity requirements for the banking sector were in need of a major overhaul. Directives
2009/83 & 111/EC featured measures to make banks raise their tier one and tier two capital ratios. CRD III introduced a leverage ratio to limit banks borrowings and a
net stable funding ratio to force institutions to match the duration of their liabilities and assets more closely. Other than the more gradual timetable for bringing in the
leverage and liquidity ratios, banks will be able to count government and high-quality corporate bonds toward the stock of liquid assets they have to hold against a future
crisis. New elements in CRD IV included: 1) Enhanced governance the proposal strengthens the requirements with regard to corporate governance arrangements and
processes and introduced new rules aimed at increasing the effectiveness of risk oversight by boards, improving the status of the risk management functions and ensuring
effective monitoring by supervisors of risk governance; 2) Sanctions if institutions breached EU requirements, the proposal ensured that all supervisors could apply
sanctions that are truly dissuasive, but also effective and proportionate; for example administrative fnes of up to 10% of an institutions annual turnover, or temporary
bans on members of the institutions management body; 3) Capital buffers CRD IV introduced two capital buffers on top of the minimum capital requirements: a capital
conservation buffer identical for all banks in the EU and a countercyclical capital buffer to be determined at national level; 4) Enhanced supervision the EC proposed to
reinforce the supervisory regime to require the annual preparation of a supervisory program for each supervised institution on the basis of a risk assessment, greater and
more systematic use of on-site supervisory examinations, more robust standards, and more intrusive and forward-looking supervisory assessments.
Revision to the
Markets In Financial
Instruments Directive
(MiFIR/MiFID II)
Implemented In 2007, MiFID I introduced a single market and regulatory regime for investment services across the EU/EEA, specifying the types of Investment
instruments and services that required authorization and setting up high-level organizational and conduct of business standards that must apply to all frms. The directive
also established standards for exchanges and multilateral trading facilities, as well as pre- and post-trade price transparency requirements for order handling and best
execution. The European Commission published a post-MiFID Review (MiFID II) in October 2011 looking at changes to conduct of business rules, data consolidation, pre-
and post-trade transparency transaction reporting and inducements. The revised directive is likely to take effect from Q1 2015.
Revision to the Market
Abuse Directive
(MAR/MAD II)
The original Market Abuse Directive (MAD I) 2003/6/EC introduced a comprehensive framework to tackle insider dealing and market manipulation practices, jointly
referred to as market abuse. The European Commission assessed the application of MAD I in the light of regulatory, market and technological developments such as
electronic platforms and OTC instruments and identifed a number of problems which have negative impacts in terms of market integrity and investor protection. The
objectives of MAD II are threefold:
1) Market integrity and investor protection will be improved by clarifying which fnancial instruments and markets are covered, ensuring that instruments admitted
to trading only on a multilateral trading facility (MTF) and other new types of organized trading facilities (OTFs) are covered. In addition, the preferred options will
improve protection against market abuse by improved market transparency.
2) The necessary powers will be given to competent authorities to perform investigations where market abuse is detected and improve the deterrence of sanctioning
regimes by introducing minimum principles for administrative measures or sanctions, including the introduction of criminal sanctions.
3) The preferred options will lead to a more coherent approach by reducing options and discretions for Member states, introducing a proportionate regime for issuers,
whose fnancial instruments are admitted to trading on SME growth markets. The measures are due to take effect from Q1 2015.
Short Selling
Regulation (SSR)
236/2012
This regulation aimed to establish a uniform regime for the submission of notifcations and information by investors to national competent authorities and covered the
regulatory technical standards on notifcation and disclosure requirements with regard to net short positions. The regulation featured uniform rules regarding detailed
information, including the common standards to be used in the notifcation requirements in relation to the notifcations of net short positions on shares, sovereign debt
and uncovered sovereign credit default swaps and to the public disclosure of signifcant net short positions on shares. There were provisions for restorations under various
market conditions, formalized buyback arrangements and a key exemption for bona fde market-making activities. Certain Member States such as Italy, Spain, France and
Belgium introduced national restrictions dating back to 2010. The measures took effect in November 2012.
Retail Distribution
Review (RDR)
RDR is a FSA measure designed to help consumers achieve a fair deal from the fnancial services industry and have confdence in the products they buy and in the advice
they take. The RDR covers the distribution of retail investment products and services by any regulated entity, including banks, building societies, insurers, fund managers
and fnancial advisors. It covers the sales and distribution of investment products both where advice is given and where there is no advice and proposes the separation of
investment advice from sales and from money guidance RDR was implemented in 31 December 2012 in the UK only.
Packaged Retail
Investment Products
(PRIPs)
A series of proposals to overhaul the marketing, sales and distribution of retail investments marketed directly to consumers, broadly falling into four groups: investment
funds, insurance-based investment products, retail structured securities and term deposits. In broad terms, the EC intends to replace the existing sectorial patchwork by a
horizontal approach to both mandatory measures and selling practices in order to promote consistency of EU rules governing investor disclosures and selling, regardless of
the legal form of the product or the distribution channel employed. The future legislative action would consist of four principles: 1) Consistent, effective and enforceable
standards on pre-contractual information; 2) Clarifcation and possible harmonization of the form and content of key investor disclosures and associated marketing
materials to investors, via the use of the key investor information (KII) approach; 3) Strengthened selling rules and codes of practice for originators, distributors and
intermediaries; 4) Avoidance, management and disclosure of conficts of interest in sales, commission/hidden charges and advice process, via use of revised version of
MiFID.
Defnitions of themed regulatory measures
Shadow banking
measures
COM (2012) 102
In October 2011, the FSB defned the shadow banking system as the system of credit intermediation involving entities and activities outside or partially outside the regular
banking system, involving maturity transformation and leverage. Building on this report, the FSB-initiated fve workstreams tasked with analysing the issues in more detail
and developing effective policy recommendations. These workstreams are: 1) The BCBS would work on how to further regulate the interaction between banks and shadow
banking entities; 2) IOSCO would work on regulation to mitigate the systemic risks (including run-type risks) of MMFs; 3) IOSCO/BCBS would carry out an evaluation of
existing securitization requirements and make further policy recommendations; 4) An FSB subgroup would examine the regulation of other shadow banking entities and
report in September 2012; and 5) Another F5B subgroup would work on securities lending and repos and report in December 2012.
In August 2012, the rapporteur on shadow banking, Said EI Khadraoui MEP, issued a resolution calling for the following:
CRD IV be extended to cover non-deposit-taking fnancial institutions by setting the large exposure limit of 25% of own funds for all unregulated entities.
Shadow banking entities having a bank sponsor/linked to a bank should be included in the banks balance sheet for prudential consolidation purposes.
The EC was invited to introduce legislation to regulate money market funds and create n EU-wide database for repurchase agreements.
While recognizing the benefts exchange traded funds (ETFs) in providing retail investors access to a wider range of assets, the resolution stressed the risks that ETFs
carry in terms of complexity, counterparty risk, liquidity of products and possible regulatory arbitrage, and invites the Commission to submit a legislative proposal at
the beginning of 2013 to tackle these potential structural vulnerabilities.
Taking into account the conclusions of the Liikanen report, the Commission was invited to propose legislation to separate commercial and investment banks,
particularly in order to avoid the fnancing of shadow banking activities via savings.
CSD Regulation
(CSDR)
COM (2012) 73
CSDs are systemically important institutions that enable settlement by operating securities settlement systems that record how many securities have been issued by whom
and each change in the holding of those securities within client accounts. CSDs also play a crucial role for the collateral market especially for monetary policy purposes.
Important barriers to integrating the European trading market still exist, resulting in a very fragmented market as well as a negative impact on the risks associated with
cross-border transactions and their settlement effciency. The proposed regulation introduces an obligation to represent all transferable securities in book entry form
(the so-called dematerialization/immobilization of securities) and to record these in CSDs before trading them on regulated venues. Second, the settlement periods
and settlement regimes across the EU will be harmonized under a common set of rules and standards and set at two days after the trading day (T+2) , although shorter
settlement periods will be permitted. Third, the proposed provisions aim to subject market participants that fail to deliver securities on the intended settlement date to a
harmonized buy in procedure, which may be executed by settlement day plus four working days (S+4) by a CCP in the case of a cleared transaction or otherwise included
in trading venues own rules.
1/2/3 LD . . . . . . . . . . . . . . . . . . frst, second and third lines of defense
A1/P1/FI . . . . . . . . . . . . . . . . . . Ratings issued by Standard & Poors, Moodys and Fitch CRAs
ABC . . . . . . . . . . . . . . . . . . . . . . Anti-bribery and corruption
A(M)BS. . . . . . . . . . . . . . . . . . . . Asset/mortgage backed securities
AFM . . . . . . . . . . . . . . . . . . . . . . Autoriteit Financile Markten www.afm.nl
AIF/MD. . . . . . . . . . . . . . . . . . . . Alternative Investment Fund Managers Directive (2011/61/EU)
AIMA . . . . . . . . . . . . . . . . . . . . . Alternative Investment Management Association - www.aima.org
AMF . . . . . . . . . . . . . . . . . . . . . . Autorit des Marchs Financirs - www.amf-france.org
AML . . . . . . . . . . . . . . . . . . . . . . Anti-money laundering
APAs . . . . . . . . . . . . . . . . . . . . . Approved publication arrangements (for MiFID II)
ARM . . . . . . . . . . . . . . . . . . . . . . Approved (transaction) reporting mechanism
ARROW . . . . . . . . . . . . . . . . . . . (FSAs) Advanced Risk-Responsive Operating framework
AuM . . . . . . . . . . . . . . . . . . . . . . Assets under management
BaFIN. . . . . . . . . . . . . . . . . . . . . Bundesanstalt fur Finanzdienstleistungsaufsicht - www.bafn.de
BCN/S . . . . . . . . . . . . . . . . . . . . Broker crossing network/system (for MiFID II)
CARP . . . . . . . . . . . . . . . . . . . . . Capital assessment risk profle
CASS . . . . . . . . . . . . . . . . . . . . . Client asset sourcebook (FSA Rules)
CBT. . . . . . . . . . . . . . . . . . . . . . . Computer-based training
CC/I/RO . . . . . . . . . . . . . . . . . . . Chief Compliance/Investment/Risk Offcer
CCP. . . . . . . . . . . . . . . . . . . . . . . Central counterparty
CDS . . . . . . . . . . . . . . . . . . . . . . Credit default swap
CF. . . . . . . . . . . . . . . . . . . . . . . . (FSA) Controlled function
CFD. . . . . . . . . . . . . . . . . . . . . . . Contract for difference
CFTC . . . . . . . . . . . . . . . . . . . . . Commodities and Futures Trading Commission - www.cftc.gov
CLS. . . . . . . . . . . . . . . . . . . . . . . Continuous linked settlement (PvP mechanism for FX)
CMAR. . . . . . . . . . . . . . . . . . . . . Client money and assets return
COB . . . . . . . . . . . . . . . . . . . . . . Conduct of business
COBAM. . . . . . . . . . . . . . . . . . . . Client on-boarding and management (aka Know Your Client)
COI . . . . . . . . . . . . . . . . . . . . . . . Confict of interest
CONSOB. . . . . . . . . . . . . . . . . . . Commissione Nazionale per la Societa e la Borsa
COREP . . . . . . . . . . . . . . . . . . . . Common Reporting harmonized European CRD reporting
CRAs . . . . . . . . . . . . . . . . . . . . . Credit rating agencies
CRD III/IV . . . . . . . . . . . . . . . . . Capital Requirements Directives III/IV (2009/83 & 111/EC)
CSA . . . . . . . . . . . . . . . . . . . . . . Commission sharing agreement
CSDR . . . . . . . . . . . . . . . . . . . . . Central Securities Depository Regulation
CSSF. . . . . . . . . . . . . . . . . . . . . . Commission de Surveillance du Secteur Financier - www.cssf.lu
DCM . . . . . . . . . . . . . . . . . . . . . . Derivative clearing member
DFA. . . . . . . . . . . . . . . . . . . . . . . Dodd-Frank and Wall Street Protection Act 2010
DRMP. . . . . . . . . . . . . . . . . . . . . Derivative risk management policy
ECP. . . . . . . . . . . . . . . . . . . . . . . Eligible contract participant (under Dodd-Frank)
ECT. . . . . . . . . . . . . . . . . . . . . . . European consolidated tape (under MiFID II)
EMIR. . . . . . . . . . . . . . . . . . . . . . European Market Infrastructure Regulation
EPM . . . . . . . . . . . . . . . . . . . . . . Effcient portfolio management
EQS. . . . . . . . . . . . . . . . . . . . . . . Equity swap
ESG. . . . . . . . . . . . . . . . . . . . . . . Environmental, social and governance
ESMA . . . . . . . . . . . . . . . . . . . . . European Securities Market Authority - www.esma.eu
ET. . . . . . . . . . . . . . . . . . . . . . . . Extraterritoriality
ETF/P/C/N. . . . . . . . . . . . . . . . . Exchange traded fund/product/commodity/note
EXO . . . . . . . . . . . . . . . . . . . . . . Execution-only
FATCA . . . . . . . . . . . . . . . . . . . . Foreign Account Tax Compliance Act
FATF. . . . . . . . . . . . . . . . . . . . . . Financial Action Task Force - www.fatf-gaf.org/pages
FCA. . . . . . . . . . . . . . . . . . . . . . . Financial conduct authority
FCMs . . . . . . . . . . . . . . . . . . . . . Futures commission merchants (for US regulation
. . . . . . . . . . . . . . . . . . . . . . . . . . of OTC derivatives)
FFI/FFO . . . . . . . . . . . . . . . . . . . Foreign fnancial institution/organization (for FATCA)
FIX . . . . . . . . . . . . . . . . . . . . . . . Financial information exchange
FMIs . . . . . . . . . . . . . . . . . . . . . . Financial market infrastructures
FOR . . . . . . . . . . . . . . . . . . . . . . Fixed overhead requirement
FRC. . . . . . . . . . . . . . . . . . . . . . . Financial Reporting Council
FSA. . . . . . . . . . . . . . . . . . . . . . . Financial Services Authority - www.fsa.gov.uk
FTE. . . . . . . . . . . . . . . . . . . . . . . Full-time equivalent
GL. . . . . . . . . . . . . . . . . . . . . . . . General ledger
GRR . . . . . . . . . . . . . . . . . . . . . . Global regulatory reform
GTAA . . . . . . . . . . . . . . . . . . . . . Global tactical asset allocation
HFT. . . . . . . . . . . . . . . . . . . . . . . High frequency trading
HMT . . . . . . . . . . . . . . . . . . . . . . Her Majestys Treasury - www.hm-treasury.gov.uk
ICAAP. . . . . . . . . . . . . . . . . . . . . Internal Capital Adequacy Assessment Process
ICG . . . . . . . . . . . . . . . . . . . . . . . Individual capital guidance
ICVC. . . . . . . . . . . . . . . . . . . . . . Investment company with variable capital (akin to OEICs)
IFA . . . . . . . . . . . . . . . . . . . . . . . Independent fnancial advisor
IGA . . . . . . . . . . . . . . . . . . . . . . . (FATCA Model) intergovernmental agreement
IM . . . . . . . . . . . . . . . . . . . . . . . . Instant messaging
IMA. . . . . . . . . . . . . . . . . . . . . . . Investment managers agreement
IOI(s). . . . . . . . . . . . . . . . . . . . . . Indication(s) of interest
IOSCO. . . . . . . . . . . . . . . . . . . . . International Organization of Securities Commissions
IRR . . . . . . . . . . . . . . . . . . . . . . . Integrated regulatory reporting (used by the FSA)
IRS . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap
KI(I)D . . . . . . . . . . . . . . . . . . . . . Key Investor (Information) Document
KYC . . . . . . . . . . . . . . . . . . . . . . Know Your Customer/Client
KP/R/CI(s) . . . . . . . . . . . . . . . . . Key performance/risk/compliance indicator(s)
LDI . . . . . . . . . . . . . . . . . . . . . . . Liability driven investing
LEI . . . . . . . . . . . . . . . . . . . . . . . Legal entity identifer
LSOC . . . . . . . . . . . . . . . . . . . . . Legal separation with operational co-mingling
LTIP . . . . . . . . . . . . . . . . . . . . . . Long-term investment plan (for remuneration code)
M&A . . . . . . . . . . . . . . . . . . . . . . Merger and acquisition
MAR/MAD II . . . . . . . . . . . . . . . . Market Abuse Regulation/Directive II
MCA . . . . . . . . . . . . . . . . . . . . . . Master confrmation agreement (for ISDAs)
MCF . . . . . . . . . . . . . . . . . . . . . . Multi-lateral clearing facility
MI . . . . . . . . . . . . . . . . . . . . . . . . Management information
MiFIR/MiFID II . . . . . . . . . . . . . . Markets in Financial Instruments Regulation/Directive II
MLD III . . . . . . . . . . . . . . . . . . . . Money Laundering Directive III (2005/65/EC)
MLRO. . . . . . . . . . . . . . . . . . . . . Money Laundering Reporting Offcer
MSP . . . . . . . . . . . . . . . . . . . . . . Major swap participant (under Dodd-Frank)
MTF . . . . . . . . . . . . . . . . . . . . . . Multi-lateral trading facility
NAV . . . . . . . . . . . . . . . . . . . . . . Net asset value
NDFs. . . . . . . . . . . . . . . . . . . . . . Non-deliverable forwards
NED . . . . . . . . . . . . . . . . . . . . . . Non-Executive Director
NURS . . . . . . . . . . . . . . . . . . . . . Non-UCITS retail scheme
OBI . . . . . . . . . . . . . . . . . . . . . . . Outside business interests
OEIC. . . . . . . . . . . . . . . . . . . . . . Open-ended investment company
OFAC . . . . . . . . . . . . . . . . . . . . . Offce of Foreign Assets Control (operated by US Department of
. . . . . . . . . . . . . . . . . . . . . . . . . . the Treasury) - www.treas.gov/offces/enforcement/ofac
OIS . . . . . . . . . . . . . . . . . . . . . . . Overnight index swap
OIVoP. . . . . . . . . . . . . . . . . . . . . FSAs own initiative variation of permission
OMS . . . . . . . . . . . . . . . . . . . . . . Order management system
ORM. . . . . . . . . . . . . . . . . . . . . . Operational risk management
OTC . . . . . . . . . . . . . . . . . . . . . . Over the counter
OTF. . . . . . . . . . . . . . . . . . . . . . . Organized trading facility
P8 employees . . . . . . . . . . . . . . Principle 8 Employee employees who perform a signifcant
. . . . . . . . . . . . . . . . . . . . . . . . . . infuence function or whose activities could have a signifcant
. . . . . . . . . . . . . . . . . . . . . . . . . . impact on the risk position of the frm
PDMR. . . . . . . . . . . . . . . . . . . . . Person discharging managerial responsibilities
PEP(s) . . . . . . . . . . . . . . . . . . . . Politically exposed person(s)
PERG . . . . . . . . . . . . . . . . . . . . . Perimeter Guidance Manual
PIP . . . . . . . . . . . . . . . . . . . . . . . Product Intervention Paper (DP11/01)
PMS . . . . . . . . . . . . . . . . . . . . . . Portfolio management system
PPR . . . . . . . . . . . . . . . . . . . . . . Private placement regime
PRA . . . . . . . . . . . . . . . . . . . . . . Prudential regulatory authority
PRIPs . . . . . . . . . . . . . . . . . . . . . Packaged retail investment products
QCF Level 4. . . . . . . . . . . . . . . . Qualifcations and Credit Framework for RDR
QIF . . . . . . . . . . . . . . . . . . . . . . . Qualifed investment fund
RAO . . . . . . . . . . . . . . . . . . . . . . Regulated Activities Order (from FSMA 2000)
RC(S)A. . . . . . . . . . . . . . . . . . . . Risk and controls (self) assessment
RDR . . . . . . . . . . . . . . . . . . . . . . (FSAs) Retail Distribution Review
RegNMS. . . . . . . . . . . . . . . . . . . Regulation National Market System
RMP . . . . . . . . . . . . . . . . . . . . . . Risk mitigation programme (ARROW methodology)
ROI/ROCE . . . . . . . . . . . . . . . . . Return on investment/capital employed
RPPD . . . . . . . . . . . . . . . . . . . . . Responsibilities of providers and distributors
RPS . . . . . . . . . . . . . . . . . . . . . . Remuneration policy statement
RRP . . . . . . . . . . . . . . . . . . . . . . Risk and resolution planning
SARs. . . . . . . . . . . . . . . . . . . . . . Suspicious activity reports (for AML reporting)
SBL. . . . . . . . . . . . . . . . . . . . . . . Stock borrowing and lending
SEC. . . . . . . . . . . . . . . . . . . . . . . Securities and Exchange Commission - www.sec.gov
SDR . . . . . . . . . . . . . . . . . . . . . . Swap data repository (under Dodd-Frank)
(FSMA) Section 166 . . . . . . . . . FSAs Skilled Persons Report based on CP91
SEF. . . . . . . . . . . . . . . . . . . . . . . Swap execution facility (under Dodd-Frank)
SICAV. . . . . . . . . . . . . . . . . . . . . Socit dInvestissement Capital Variable
SID . . . . . . . . . . . . . . . . . . . . . . . Supplementary Information Document (for UCITS IV KID)
SIFs. . . . . . . . . . . . . . . . . . . . . . . Signifcant infuence functions
SIFIs/MUs . . . . . . . . . . . . . . . . . Signifcant interest fnancial institutions/market utilities
SLA. . . . . . . . . . . . . . . . . . . . . . . Service level agreement
SLRP . . . . . . . . . . . . . . . . . . . . . Supervisory liquidity review process
SME . . . . . . . . . . . . . . . . . . . . . . Small or medium size enterprise
SOCA . . . . . . . . . . . . . . . . . . . . . Serious organized crime agency
SREP . . . . . . . . . . . . . . . . . . . . . Supervisory review and evaluation process
SRI . . . . . . . . . . . . . . . . . . . . . . . Socially-responsible investing
SRRI . . . . . . . . . . . . . . . . . . . . . . Synthetic Risk & Reward Indicator (for UCITS IV KIID)
SSR. . . . . . . . . . . . . . . . . . . . . . . Short-selling regulation
SWFs . . . . . . . . . . . . . . . . . . . . . Sovereign wealth funds
SYSC . . . . . . . . . . . . . . . . . . . . . Systems and controls
TCA . . . . . . . . . . . . . . . . . . . . . . Transaction cost analysis
TCF. . . . . . . . . . . . . . . . . . . . . . . Treating customers fairly
TER. . . . . . . . . . . . . . . . . . . . . . . Total expense ratio
TIN . . . . . . . . . . . . . . . . . . . . . . . Taxpayer identifcation number (for FATCA)
TMU . . . . . . . . . . . . . . . . . . . . . . Transaction monitoring unit (at FSA)
TOB . . . . . . . . . . . . . . . . . . . . . . Terms of business
TR(E)M. . . . . . . . . . . . . . . . . . . . Trade reporting (exchange) mechanism
TRS. . . . . . . . . . . . . . . . . . . . . . . Total return swap
UBO . . . . . . . . . . . . . . . . . . . . . . Ultimate benefcial owner
UCITS IV-VI . . . . . . . . . . . . . . . . Undertakings for collective instruments in transferable securities
VaR. . . . . . . . . . . . . . . . . . . . . . . Value at risk (for assessing market risk)
V/TWAP. . . . . . . . . . . . . . . . . . . Volume/time-weighted average price
XCS. . . . . . . . . . . . . . . . . . . . . . . Cross (X) currency swap
Glossary of acronyms
Contacts
For further information, please contact:
We would like to thank all the following who supported the survey:
Roy Stockell, Ratan Engineer, Julian Young, Michael Hornsby, Frank de Jonghe,
David Parkinson, Ian Dando, Rob Long, Caroline Hurst, James Boyson, Annette Fisher,
Dean Brown, Zeynep Meric-Smith, Derek Pennor, Michael-John Albert, Paul Stratford,
Valerie Nott, Maurizio Grigolo, Laurent Denayer, David Koestner, Oliver Heist,
Olivier Drion, Elizabeth Wynds
Dr. Anthony W. Kirby
Head of Regulatory Reform
Asset Management
+44 20 7951 9729
akirby1@uk.ey.com
Gillian Lofts
UK Asset Management
Leader
+44 20 7951 5131
glofts@uk.ey.com
John Liver
Partner
Ernst & Young LLP
+44 20 7951 0843
jliver1@uk.ey.com
Amarjit Singh
Partner
Ernst & Young LLP
+44 20 7951 4419
asingh@uk.ey.com
Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
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All Rights Reserved.
EYG no. EH0109
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