INSIDE:- Leading promoters on Ireland- Twenty five years of investment funds- Fund servicing profiles- Attractions of the domicile

INVESTMENTFUNDSERVICES IRELAND2012

SPECIAL REPORT SEPTEmbER 2012

3 FINANCE DUBLIN YEARBOOK 2011

Contents4 The fund promoter customerbase of Ireland's investment fundsindustryWhy some of the largest moneymanagers in the world continually useIreland as their go-to-domicile

5 The story of the Irish investmentfunds industryThe key moments that shaped the Irishfund industry

6 Briefing: Investment fundlistings at the Irish Stock Exchange

A background to the ISE’s listingregime and the advantages it offers toinvestment funds

8 Ireland’s stellar record incorporate governance forinvestment funds

Ireland’s world leading corporategovernance standards

10 Ireland’s ‘plug and play’compliance with AIFMD gives it theedgeCiti’s Catherine Brady on how Ireland isin a more advanced stage ofpreparedness than any other domicilewhen it comes to AIFMD, UCITS V andFATCA

12 HSBC’s middle office serviceoffering meets the hedge fundindustry’s more institutional modelThe latest from HSBC SecuritiesServices which is establishing its Dublinoffice as its hub for alternative fundsglobally

15 The Irish SICAV due in 2013

Ernst &Young on how the new ‘iCav’structure will facilitate fund migrationsto Ireland

18 RBC Investor Services’alternative investments hub inIreland

20 Risk management strategiesfor investment funds - KPMGAnd the growing demands on fundsboards

22 Irish PRISM regulatoryapproach differentiates degrees ofrisk and provides proportionateapproachDillon Eustace’s Donnacha O’Connoron the Central Bank of Ireland’s focuson governance and its new risk-basedsupervisory approach, PRISM(Probability Risk Impact SysteM) andhow it places proportionality at its heart

24 The global reach of the fundsindustryBrown Bros Harriman’s hub at the heartof the growth trend of new business forIreland beyond the Anglosphere

26 The cutting edge in datamanagement servicesState Street’s latest data management

offering meets market’s demands

28 Regulatory challenges facingexchange traded fundsWilliam Fry’s Tara O’Reilly on how theIrish funds industry is positioned toretain its place as global leader in ETFs.

30 Citco’s services to help hedgefunds to navigate through a recordnumber of regulatory challenges

Innovative services that meet thechallenges posed by Dodd Frank,FATCA and AIFMD

Published by Fintel Publications Limited, FintelHouse, 6 The Mall, Beacon Court, Dublin 18, Ireland.

Telephone: 293 0566 Fax: 293 0560

E-mail: editorial@financedublin.com

Websites: www.financedublin.com; www.finance-magazine.com; www.financejobs.ie

Published as a supplement of:FINANCE DUBLIN (ISSN 0790 8628 ) (c)(All rights reserved) ((Incorporating FINANCE (ISSN0790 8628)) (c) (All rights reserved)

Investment FundServices Ireland 2012

Going from strength to strength

THIS is the third edition of the Finance DublinInvestment Fund Services Ireland report and it ispublished as the industry records another leap forwardwith the release of statistics by the Central Bank showingan increase of €42.179 billion in NAVs in the month ofJuly 2012. A year has not yet passed since the industrysurpassed €1 trillion in total NAVs of Irish authorisedfunds, and July’s increase puts in mind an earliermilestone, less than 15 years ago, when a surveyconducted by Finance Dublin recorded the first €100billion plus total for both domiciled and non domiciledfunds administered in Ireland. This July proved to be arecord breaking month with Cumulative NAVs of IrishAuthorised Collective Investment Schemes reaching€1,199.2521. This represents a 12.1 p.c. increase on atotal of €989.0374, a year earlier.

The main reasons the industry has been successful has

been its relentless customer focus since the earliest days,as industry pioneers spread the world in markets aroundthe world. The report reflects this focus, with profiles andcontributions from customers of the Irish funds industryamongst world-leading fund promoters and moneymanagers, such as Lawrence Fink’s (above top left)Blackrock, and Bill Gross’s (top right) PIMCO.

The report illustrates how the jurisdiction continues toevolve and its ability to adapt to the needs of the globalmarket in ways that no other funds domicile can. Thecorporate and business profiles in this report includemany of the stakeholders who are pushing the agenda ofthe jurisdiction and making it the success it has become.These companies are: Brown Brothers Harriman; CitcoFund Services; Citi; Dillon Eustace; Ernst & Young;Hainault Capital; HSBC; The Institute of Bankers inIreland; KPMG; Linedata Services; Matheson OrmsbyPrentice; RBC Investor Services; State Street; WilliamFry.

Global Fund Promoters on Ireland’s Funds Industry4

Goldman Sachs Asset Management

Goldman Sachs Asset Managementhas $714.60 billion in assetsunder management.

What has made the Irish funds industrysuch a success? A regulatory

environmentwhich seeks tobe simple andflexible across arange ofdifferent fundstructures,includingcorporate andunit trust vehicles,which qualify asUCITS for retail distribution orQualifying Investor Funds for non-retaildistribution;A broad range of fund service providers

with full service offerings (custody, fundadministration, transfer agency);Multi-lingual client servicing and A good range of legal firms supporting

the funds industry.

Why does your company continuallychoose Ireland as a domicile or why yourcompany chooses Irish based companiesto provide services to your funds?Investors often seek funds that are

appropriately regulated.

Shoqat Bunglawala, managingdirector at Goldman Sachs AssetManagement.

Insight InvestmentInsight is a specialist asset manager

launched in 2002. It has grown to be oneof the largest asset managers in the UK.As of Q2 2012 it has €182 billion in assetsunder management. It is a subsidiary ofThe Bank of NewYork Mellon.

What has madethe Irish fundsindustry such asuccess?A successful

financial centreneeds to satisfy therequirements ofproduct and serviceproviders. At the same time, it also needsto encourage investors through ademonstrable commitment to investorprotection. Ireland has reconciled thesecompeting issues in relation to funds verysuccessfully, and arguably moreeffectively than other financial centres.

Why does your company continuallychoose Ireland as a domicile or why yourcompany chooses Irish based companiesto provide services to your funds?A number of factors are at play here: a

well-educated work force, a carefullyconstructed business and taxationframework to attract business to help themthrive, and a strong balance betweeninvestor protection and the promotion ofinnovation.Now that a number of international

players have established a significant

presence, the outlook for Ireland as aleading financial centre looks verypositive.

Charles Farquharson, chief riskofficer, Insight Investment.

Russell InvestmentsRussell Investments was founded in

1936 and is headquartered in Seattle,Washington, USA. It has $138 billion inassets under management globally and$32 billion EMEA. The company has over2300 clients and over 600 independentdistribution partners.

What has made the Irish funds industrysuch a success?The Irish funds industry has been a

success for a variety of reasons. It isEnglish-speaking, it has a well educatedwork force and, particularly since theeconomic downturn, provides good value.But two very important reasons thatIreland has been successful are an openand commercial regulator and of coursethe 12.5 per cent tax rate. The former isbecoming less true, and the governmentshould be aware that that is the case. Thelatter is the jewel in the crown, and thegovernment should do everything in itspower to protect it.

Why does your company continuallychoose Ireland as a domicile or why

your company chooses Irish basedcompanies to provide services to your

funds?We chose Ireland as a domicile for the

FINANCE DUBLIN | SEPTEMBER 2012

The fund promoter customer base of Ireland's investmentfunds industry

As Ireland’s funds industry surpassesall-time records, the opportunities fromthe coming wave of changes are profiled

Irish fund administrators service assets in more than 11,000 funds from almost 170 countries from American Samoa toZambia and offer support capabilities in 28 languages and 23 currencies. Some 850 investment managers across theworld use Ireland as their international hub to distribute across the globe. We asked a number of the leading fundpromoters, among them the world's biggest money managers, to comment on their business in Ireland.

As the Irish funds industry goes from strength to strength this third edition of the Finance Dublin InvestmentFund Services Ireland report looks at the evolving product and service offerings of the industry whichprepares for the profound challenges and opportunities spurred by regulatory changes such as AIMFD,FATCA and UCITS V that promise to consolidate the jurisdiction’s global leading position.

Shoqat Bunglawala

Charles Farquharson

Global Fund Promoters on Ireland’s Funds Industry 5FINANCE DUBLIN | SEPTEMBER 2012

reasons cited above.Over 19 years ourfunds business hascome to be built onIreland as ouroffshore platform,and we sell our Irishbased products inmore than 40countries. As forservice providers,Ireland has become a centre of excellence,and we generally use Irish serviceproviders for our offshore products aswell. However, the regulatory situation inEurope generally and in Irelandspecifically is causing us to explore otherdomiciles, both regulated and traditionaloffshore domiciles like the CaymanIslands, and it is likely we will use thosedomiciles far more tactically in future.

Jim Firn, head of product &governance at Russell EMEA.

State StreetState Street Global Advisors (SSgA) is

the asset management business of StateStreet Corporation, one of the world'sleading providers of financial services toinstitutional investors, with a heritagedating back over two centuries. Thecompany has over 450 investmentprofessionals and over 2400 employeesaround the world. Last year it acquiredBank of Ireland Asset Management(BIAM).

'As clients seek opportunities in newmarkets, Irelandprovides theplatform fordistribution on aglobal scale as webuild increasinglysophisticated andintegratedsolutions to meetclients’ evolvingchallenges.Through recenttough times, the expertise and resourcesavailable in Ireland have driven continuedsuccess for the local funds industry.'

Jay Hooley, chairman, president andCEO of State Street Corporation.

HSBCHSBC Global Asset Management had

assets totalling $409 billion at the end ofJune 2012. It has offices in 30 countriesaround the world.

“Ireland offers many appealing features.When choosing a fund domicile, at HSBCwe look at 5 factors: membership ofinternational organisations, regulation,tax, operations and infrastructure and

brand. Ireland ticks boxes across all ofthese. Clearly it shares common groundwith other locations in terms of its EUmembership, but it also offers the rightinfrastructure, has a solid reputation fordevelopment of new products giving itfirst mover advantage, backed up by anuncomplicated tax regime and strongregulation. Above all, it has a cleargovernment commitment to the industry.At HSBC Global Asset Management we

1989 The AIG American Equity Trust becomesthe first UCITS fund to be established inIreland, and the first fund to be listed onthe Irish Stock Exchange.

June:The UCITS directive comes intoeffect in Ireland. The Finance Act of 1989grants UCITS funds a tax exemption fromcorporation tax, capital gains tax,withholding tax and other taxes laying thefoundations for the industry to grow.

1990December:The Companies Act 1990 isenacted, including Part XIII, whichprovides the legislative basis forQualifying Investor Funds, (QIFs) whichprovides a bedrock for the long termdevelopment of the investment fundsindustry.

1998July:The Irish Government and the EUreach agreement on the introduction of thenew 12.5 per cent Irish corporation taxregime.

2000April: First Exchange Traded Fundscreated in Europe, as UCITS, as twoMerrill Lynch UCITS domiciled inIreland. ETFs have taken off, having beenfirst established in New York to track theS&P 500 in 1993. This ultimately growsto become a veritable asset class, in whichthe Irish funds industry administered athird of the European ETF business by2012.

2001June: UCITS II and I adopted at ECOFINCouncil meeting.

2002February: UCITS III Directive published.

December: Ireland becomes the firstEuropean jurisdiction to allow theauthorisation of retail fund of hedgefunds. Dublin registered funds grew by 15

per cent in 2002, surpassing €300 billionfor the first time. The total number ofIrish collective investment schemes is3,300.

2003October: Ireland is the leading domicilefor European registered exchange-tradedfunds (ETFs), with almost 28 per cent ofEuropean funds domiciled in Ireland,according to the Morgan StanleyExchange Traded Funds WorldwideGuidebook.

2005September: The net asset value (NAV) ofIrish registered investment funds passes€500 billion mark for the first time. As ofJune 30th, 2005, the NAV of Irish fundsstood at €513.9 billion.

2010January: A change to Irish fundlegislation will allow funds to redomicilein Ireland more easily. UCITS IV, and arise in appetite for regulated products eg.'Newcits' will bring opportunities toIreland.

2011 Ireland is amongst the first group of EUmember states to sign the UCITS IVDirectiveThe Central Bank relaxes Ireland's'Minimum Activities' regulations,originally introduced in 1995.

The changes implement proposals in aCentral Bank Consultation Paper (48) thatproposed the relaxation of restrictions thatrequired Irish domiciled fundadministrators to perform minimumactivities, such as fund NAV calculationand investor correspondence in Ireland.

November: Figures from the Central Bankof Ireland show that the cumulative netasset value for Irish authorised collectiveinvestment schemes surpasses €1 trillionfor the first time.

Jim Firn

Jay Hooley

Ireland’s Fund Milestones

“Now that a number ofinternational players haveestablished a significantpresence, the outlook forIreland as a leading financialcentre looks very positive.”

Global Fund Promoters on Ireland’s Funds Industry6

continue to invest inIreland, inparticular where itstands out as acentre of excellencein such diverseareas as liquidityfunds, ETFs andalternative fundadministration.”

Adam Fairhead head of productdevelopment, HSBC Global AssetManagement Ltd.

BlackrockBlackRock has over 260 funds and

€162 billion of assets domiciled inIreland which includes over 130 iSharesfunds, a wide range of institutionalpooled vehicles and Europe’s largestrange of Irish domiciled Money Marketfunds.Blackrock launched its first Irish fund

in 1995. Blackrock employs about 10,100people in 27 countries and maintains amajor presence in key global markets,

including those in North and SouthAmerica, Europe, Asia, Australia, theMiddle East, and Africa.BlackRock, is one of the biggest

investment managers in the world withUSD3.5 trillion under management, itannouncedearlier this year that it isopening a new base in Dublin.BlackRock’s client business in Irelandstands at over €5bn.‘This office opening represents our

commitment to serve BlackRock’sgrowing client base in Ireland better. Ourteam in Dublin will be able to leverageBlackRock’s global expertise and breadthof product offerings to best serve clientsand their advisers locally,’ said JamesCharrington, Chairman for BlackRock’sEMEA business.

Northern TrustNorthern Trust Asset Management had

$704 billion in assets under managementas of June 30, 2012.'Ireland is the European service centre

of choice for hedge funds, a leadingdomicile for cross-border fund

administration, amajor and growingcentre forinternationallydistributed UCITS,and a leadingEuropean domicilefor exchange-tradedfunds. While no country

is immune to thechallengespresented across the global economiclandscape, Ireland has developed aneffective and robust regulatoryframework which has seen the number offunds (including sub funds) administeredin Ireland increase to 11,211 as atSeptember 2011, representing total assetsunder administration of 1.8 trillion euro.We believe leading asset managers will

continue to look to Ireland as a domicileof choice - as will Northern Trust.'

Frederick H.Waddell, chairman andCEO of Northern Trust.

FINANCE DUBLIN | SEPTEMBER 2012

Adam Fairhead Frederick Waddell

The development of the ISE's fundlistings business began in 1989with the listing of its first UCITS,

AIG American Equity Trust. By 1995 theISE had built a successful internationalfunds business.Following the emergence of asset

backed securities as an asset class in theUSA, by the mid 2000s it had become theEuropean venue of choice for the listingof structured debt, eventually eclipsingestablished rivals like the LuxembourgStock Exchange with a 70 per cent marketshare.It has also commenced partnership

arrangements with European providers toensure the Irish market has world classtrading, settlement and clearing facilities.The success of Irish domiciled funds is

reflected in the fact that Irish fundsrepresent 80 per cent of the ISE's newlistings in 2012. According to GerrySugrue, listing manager for investmentfunds at the ISE, 'This year, many large,well known ETF providers continue to usethe ISE as their choice of listing venue.The ISE offers a streamlined listingprocess for all Irish funds which meansissuers can move to market very quickly.

The QIF, for example, has a 24 hourturnaround.' The ISE has listed funds from a variety

of jurisdictions in 2011. 'On the offshoreside, the activity levels indicate there is await and see approach being taken bymany managers regarding single fundlaunches until the finer details of theAlternative Investment ManagersDirective (AIFMD) are known,' notesSugrue. 'Notwithstanding that, the ISE haslisted funds from Jersey, Cayman Islands,Bermuda, BVI and Delaware this year.Earlier in 2012, a policy changeformalised an approach to cash depositsadopted by the ISE following the financialcrisis that facilitates a listed fund inreducing their exposure to a single primebroker. London and New York continue tobe the primary investment managementcentres for most of the 2,800 listed fundson the ISE but the ISE has funds managedfrom over 40 different jurisdictionsadmitted to its regulated market and some,such as Switzerland and South Africa,feature prominently in 2012.'The ISE's fast-paced reaction to

industry changes is one of its key facets inattracting listings. According to Therese

Redmond, head of listing services atWalkers Ireland, 'The ISE is recognisedinternationally as a leading exchange forthe listing of investment funds, andcontinues to be the exchange of choice forpromoters and managers who view alisting on the ISE as an invaluablemarketing tool when seeking to attractinvestors and open distribution channelsfor their funds. One of the key successfactors of the ISE has been itsresponsiveness to challenges faced bymarket participants. In particular, in thepast 18 months the ISE has enhanced itslisting rules to accommodate changes inthe investment funds landscape e.g.bolstering its independent directorrequirements; prescribing amended primebroker suitability criteria in response toregulatory and credit rating changes in theprime broker environment; broadening itsinvestment restrictions/diversificationrequirements regarding investments inopen-end funds and the holding of cash ondeposit, subject to specific requirementsbeing met. As a dynamic exchangeoffering a robust, sound listing regime, weexpect the ISE to continue to attractlistings to Ireland.'

The funds listing business of the Irish Stock Exchange

Despite challenges including a 'wait and see' approach pending clarification of the AIFMD, the ISE has seen some recentgrowth, with 80 per cent of its new listings in 2012 consisting of Irish domiciled funds.

Corporate Governance8

Following the global financial crisesof 2008-2009, one of the areaswhich began to receive significant

attention internationally was the corporategovernance of financial institutions. InIreland, the Financial Regulator indicatedearly on that this would be an area ofincreased focus for the regulatoryauthorities in Ireland. In April of 2010, the Financial

Regulator announced that a new detailedstatutory corporate governance regimewas to be introduced for banks andinsurance companies under existingfinancial services legislation. This cameinto effect for boards and their directorsfrom 1 January 2011.In announcing the new regime,

however, the Regulator, MatthewElderfield, specifically stated that on arisk based assessment ‘a one size fits allapproach is not appropriate for all sectors.On this basis we consider that the rigorouscorporate governance standards we arenow proposing for banks and insurancecompanies may not be appropriate for thefunds sector’.

For the funds sector, the FinancialRegulator instead proposed that the IrishFunds Industry Association would beinvited to prepare a voluntary code, inconsultation with the Central Bank ofIreland.

History of good corporate governancein the international financial servicesector in IrelandIn carving out a separate voluntary

regime for the international funds industryin Ireland, the Regulator was givingeffective recognition to one of the strong

pillars on which theunprecedentedsuccess of the IFSChas been based. Therequirement to havetwo Irish residentdirectors on theboards of regulatedentities has meantthat Irish directorshave been exposedto best internationalpractice, while the foreign promoters havehad strong experienced colleagues, whoare available to share their knowledge andexperience, in particular of Irishregulation, law, accounting and taxation.Over the past twenty years, many

experienced Irish professionals withsignificant international financial servicesexperience have contributed to IFSCboards, increasingly as a full timeprofessional non-executive director. Withthe ever increasing tsunami ofinternational changes in law andregulation, it has greatly assistedpromoters, funds boards and theirinvestors to know that they haveindependent non-executive directors, whoare actively keeping up withdevelopments. The days of the‘generalist’ are likely to become morenumbered, not least as recent courtjudgements, as in the Weavering Case,have required that non-executives beprofessionally up to speed with theindustry in which their companies areoperating.The establishment of the Investment

Directors’ Forum in 2008, a group of Irishbased directors active in the funds andfund management sector, to encourageknowledge dissemination and liaison withthe financial regulator is an example ofthe increasing professionalisation of thesector.Another indicator of the success of the

Irish based non-executive directors in therecent past has been their demonstratedability to survive and thrive during theworld’s greatest real time stress test of thefinancial crisis of 2008 – 2010. In thistime a lot of boards were faced withunprecedented stress events at their funds,or with their funds’ investments. TheFriday 5.30 pm call from a promoter wasnot an unusual event for some directors

during this period, when directors wouldbe required to step up to protect theinterests of investors.

Corporate Governance Code forCollective Investment Schemes (CIS)and Management CompaniesThe IFIA’s voluntary code adopts the

IOSCO definition of governance as a‘framework for the organisation andoperation of CIS that seeks to ensure thatCIS are organised efficiently andexclusively in the interests of theirinvestors, and not in the interests of CISinsiders.’The Code seeks to implement what

IFIA and the experienced directors, whowere consulted in its drafting, consider tobe established best practice. Matters suchas the appointment of independentchairmen and the definitions ofindependence and non-executive directorsare addressed. Directors are required tohave sufficient time to devote to eachfund, or management company during anyone year, with a time buffer forunexpected events, although no specificlimitation on the number of directorshipshas been set. However, there is arebuttable presumption that a maximumof 8 non-fund directorships may be heldwithout impacting on a director’s time.The code became effective on 1 January

2012. Funds and management companieshave a 12 month transitional period inwhich to adopt the Code.Where a board adopts the Code, but

decides not to apply any provision of theCode, it should set out the reasons why inthe Directors’ Report to accompany theannual audited financial statements, oralternatively publish the informationthrough a publicly available medium, suchas a website detailed in the annual report.In 2011, the Central Bank of Ireland

also introduced a new Fitness and Probityregime, whereby appointments to fundboards will in future require to be pre-approved by the Bank under an agreedtemplate. Under the regime existingdirectors have been grandfathered, subjectto due diligence by the fund board.

Peter O’Dwyer is a director of anumber of funds and director of theInvestment Directors’ Forum.

Irish funds’ corporate governance in rude good health

The Irish funds industry has proved that the standard of its corporate governance is one of the best in the world. PETERO’DWYER, director and secretary of the Investment Director's Forum in Ireland, looks at the history of the independentfund director in Ireland and explores some of the recent changes to the corporate governance regime for funds in Ireland.

FINANCE DUBLIN | SEPTEMBER 2012

Peter O’Dwyer

“Another indicator of thesuccess of the Irish basednon-executive directors in therecent past has been theirdemonstrated ability tosurvive and thrive during theworld’s greatest real timestress test of the financialcrisis of 2008 – 2010. In thistime a lot of boards werefaced with unprecedentedstress events at their funds, orwith their funds’ investments.“

DIFFERENT.Just ask our clients.

®

Brown Brothers Harriman (BBH). As a partnership for almost 200 years our culture drives

resourcefulness. We are independent thinkers. We take a consultative approach, partnering

with our clients to achieve sustainable business objectives by successfully navigating the

product development, distribution and servicing life cycle.

Ireland plays an important and strategic role in servicing the firm’s clients internationally.

Learn more about our differentiated approach at www.bbh.com.

WWW.BBH.COM

Infomediary is a registered trademark of BBH&Co.

870_

12

Scan QR code to email

Ireland’s geographic location, its poolof talent and experience, its soundregulatory environment and the

political will to promote Ireland as acentre of service excellence havecollectively been the cornerstones of itssuccess to date as a domicile forinvestment funds and their serviceproviders. Ireland has grown in the last 25years to become the second largest funddomicile in Europe and the largest centreglobally for hedge fund administration.Pure custody, fund administration andtransfer agency services have been core tothis unparalleled success.The head start that Ireland enjoys over

other European domiciles can bedemonstrated by analysing some of themore onerous impacts AIFMD, UCITS Vand FATCA will have on the assetmanagement industry.

AIFMDIncreasing numbers of alternative

investment managers are turning toIreland for solutions ahead of thefinalisation of the Level 2 implementingmeasures of AIFMD. In June 2012 theIFIA reported that the number ofQualifying Investor Funds (QIFs) inIreland had reached an all time high of1,420 with assets reaching a new peak of€182 billion. This represents an increaseof 20% since 2011 and 35% since 2010.Some of the motivating factors for manyinvestment managers looking to Ireland asthe domicile of choice for AIFMDreadiness can be summarised as follows: Valuations experience: Ireland is a

leading centre for the administration ofalternative investment funds, both globallyand within the EU. Almost 70 per cent ofEU domiciled alternative investmentfunds are administered in Ireland withapproximately 40 per cent of global assetsserviced from here. The wealth ofexperience here puts Ireland in good steadahead of some of the new requirementsthat will be introduced under AIFMD suchas the new concept of a ‘proper andindependent valuation’ of the assets.Valuations can be carried out by anexternal valuer or internally if conflicts ofinterest are mitigated. Although not arequirement, an Irish fund administratorcan assume the overall responsibility ofbecoming the ‘valuer’ of the asset.

Depending onappetites and theexistence of thenecessary strictconflict of interestmitigants andChinese walls thereare significantopportunities toleverage existingadministrativeservices in Ireland to discharge thisfunction under contract with the AIFMs. Regulatory regime and the requirement

for a Depositary: the Irish investmentindustry is a regulated one which makesthe Qualifying Investor Fund (QIF) theideal choice for alternative investmentmanagers due to its ‘plug and play’compliance with many of the AIFMD keyprovisions. For example, Irish QIFs arealready required to have independentdepositaries and Central Bank of Ireland

authorised/supervised administrators. Most importantly the QIF regime is one

where the Irish depositary must alreadyappoint Prime Brokers as their globalcustodians for assets that are notrehypothecated. Ireland is therefore theonly European domicile with a pre-existing legal framework and systemsconnectivity between depositaries and theprime brokerage community. The requisiteoversight processes and controls arealready established. UCITS expertise and middle office

requirements: Ireland has acomprehensive infrastructure in placewhich has supported UCITS funds since1989. At the end of 2010 EFAMAreported that the total assets of Irish

domiciled UCITS amounted to €5,990billion which represented 14 per cent ofthe total European UCITS market, anincrease from 10 per cent in 2007. Thisexpertise will prove invaluable for someof the UCITS-inspired restrictionsAIFMD will impose on AIFMs. Someexamples of these would be the new riskmanagement requirements, leveragedisclosures and monitoring arising fromfinancial derivative instrument exposureand liquidity stress testing. Irish serviceproviders’ experience with monitoring thecompliance of complex UCITS funds withthe detailed VaR and commitmentapproach methodologies for measuringderivative exposure will prove particularlyadvantageous in the face of some of thesenew requirements.

UCITS VThe European Commission published

proposed amendments to the UCITSDirective on 3 July 2012. Colloquiallyreferred to as UCITS V, one of the primaryareas covered by the proposals is thesetting down of uniform rules in relationto the depositary’s core safe-keeping andoversight duties. Inter alia, the proposalsrestrict delegation of the depositary’sduties to the safe-keeping of the assets ofthe UCITS and also outline the conditionsunder which the depositary may entrust itssafekeeping duties to a third-party, in linewith the corresponding conditions underAIFMD. The proposals have amended theoversight duties of the depositary toremove references to the different fundlegal structures (i.e. corporate vscontractual) in place of a generic ‘UCITS’reference, presumably with the intentionof ensuring the complete harmonisation ofdepositary duties irrespective of thedifferent UCITS fund structures available.Ireland is already UCITS V-ready in thisregard as no differentiation has ever beenmade in the transposition into Irish law ofthe various iterations of the UCITSdirective between the different fundstructures for the purpose of thedepositary’s oversight duties.Once agreement on the proposals is

reached, it is expected that Member Stateswill have two years to transpose the newprovisions into national law meaning thatthe new rules could apply by the end of2014.

European and Global Fund Regulation10 FINANCE DUBLIN | SEPTEMBER 2012

Ireland’s ‘plug and play’ compliance with AIFMD gives itthe edge

Ireland is in a more advanced stage of preparedness than any other domicile ahead of changes to the regulatoryenvironment as a result of AIFMD, UCITS V and FATCA writes Citi’s CATHERINE BRADY.

Catherine Brady

“The QIF regime is one wherethe Irish depositary mustalready appoint Prime Brokersas their global custodians forassets that are notrehypothecated. Ireland istherefore the only Europeandomicile with a pre-existinglegal framework and systemsconnectivity betweendepositaries and the primebrokerage community.”

European and Global Fund Regulation 11FINANCE DUBLIN | SEPTEMBER 2012

FATCAFATCA is aimed at combating U.S. tax

evasion by U.S. persons who maintainoffshore financial accounts either directlyor through ownership of a foreign legalentity. FATCA requires financialinstitutions to apply enhanced duediligence to identify U.S. persons that maybe trying to evade U.S. tax - either throughindividual offshore accounts or throughaccounts of foreign legal entities of whichthe US person is a substantial owner. TheAct establishes a new reporting regime onshareholder information and accountbalances, US sourced income and grossproceeds from the sale of US securitiesand also creates a new 30 percentwithholding tax that is intended to enforcenew information reporting requirementson foreign financial accounts that aredirectly or indirectly owned by certaintypes of U.S. persons. As one of the primary obligations

introduced under FATCA involves theidentification of underlying fundinvestors, the offshore experience inIreland of established anti moneylaundering practices across multipledomiciles globally where Irish funds arealready distributed in addition to offshore

tax reporting practices will proveinvaluable. This experience of dealingwith investors from multiple jurisdictionsand thereby working with variousdifferent tax issues and considerationsgives Ireland a considerable advantage

when looking to leverage the flexibility ofexisting systems and processes in helpingto achieve the successful identification ofUS investors in Irish domiciled funds.Intergovernmental agreements (IGA)

are being put in place by the IRS with anumber of EU jurisdictions which willallow for registration with local tax

authorities instead of entering intoagreements with the IRS. Ireland’santicipated inclusion in the IGAframework will significantly reducereporting costs for Irish domiciledinvestment funds. Finally, it is of historical significance

that Ireland is already seen as the domicileof choice for US fund promoters. ManyIrish service providers therefore, andparticularly those with U.S. parents havealready developed U.S. tax reportingfunctionality for both their Irish domiciledand hedge fund business.Ireland is in a more advanced stage of

preparedness than other domiciles toservice its clients ahead of changes likethese through a combination of itsregulatory environment, the experience ofits service providers, its established fundstructures and the pre-existing focus ofIrish service providers to expand theirproduct offerings beyond core fundadministration services.

Catherine Brady is managing director,head of funds product (Europe MiddleEast Africa) at Citi.

“This experience of dealingwith investors from multiplejurisdictions... gives Ireland aconsiderable advantage whenlooking to leverage theflexibility of existing systemsand processes in helping toachieve the successfulidentification of US investorsin Irish domiciled funds.”

Hedge Fund Administration12 FINANCE DUBLIN | SEPTEMBER 2012

The hedge fund industry’s movement towards a moreinstitutional model is increasing the appetite for middleoffice service offeringsHSBC Securities Services, which is on the verge of the transfer of $40 billion in alternative funds from its US location toIreland, is actively looking to establish its Dublin office as its hub for alt funds globally, writes TONY MCDONNELL.

Irish based administrators now servicemore than 40 per cent of the world’shedge funds and while global

competition for fund administration isintensifying both between serviceproviders and domiciles, overall industrytrends point to increased opportunities forIreland in the coming years. That’stestament to the way the industry inIreland has positioned itself over the lasttwenty years and the body of experiencethat has been developed. There has been a significant increase in

funds establishing themselves in Ireland,most of which has been via initial launchrather than re-domiciliation. An expectedwave of re-domiciliation from theHurricane Belt has been slow. Instead,managers have favoured a diversifiedapproach, launching a new product inIreland to enable them to appeal to theinvestor that requires a more regulatedproduct. What is being seen is the adoption of a

diversification strategy on the part ofmany of the fund managers. They areretaining funds in offshore locations whileestablishing new products in Ireland andelsewhere which are targeted to specificmarkets.

HSBC Securities Services in Ireland hasbeen actively working to establish ourDublin office as the hub for alternativefund services globally. This strategicdecision enables continued investment ofthe significant sums needed in products,in an ever-changing regulatoryenvironment where demands on serviceproviders will increase exponentially. For example, we are near completion of

a transition of circa $40 billion in

alternative hedge and fund of hedge fundassets from our USlocation. This hasadded some highlyprestigious hedgefund managers toour client list andthey have beenuniversallyimpressed withIreland as a fundservice location.The global funds

sector has not been immune to the overalleconomic environment over the past fewyears. Yet the impact here has not been assignificant as with some other sectors andthe Irish fund industry continues to growboth in terms of assets managed andnumber of funds serviced.Ireland has striven to be the European

domicile of choice, especially foralternative fund managers. Firms based inIreland have certainly become more costcompetitive in the global fund industry oflate. This is supported by the fact thatmanagers continue to gravitate to ajurisdiction where the regulator isconsidered efficient and the serviceproviders understand their product. Some observers initially considered the

advent of the Alternative Investment FundManagers Directive (AIFMD) in July2013 and the increased costs it entails as athreat to hedge funds and thereforeIreland’s emergence as a major globalcentre for their management.Yet the implementation of AIFMD will

actually provide opportunities for futuregrowth. The directive is aimed at bringing hedge

funds and other types of funds without aUCITS passport within the scope ofregulatory supervision as well asintroducing greater transparency to theway these funds operate.The overall objective is to create a

single market in Europe for alternativeinvestment funds (AIFs) and the directivewill increase public accountability of AIFmanagers, make them subject to newauthorisation and registrationrequirements, introduce new reportingobligations, and provide a commonapproach to investor protection.

The directive is to be transposed intonational law by July 22, 2013 and once ineffect, all alternative investment fundmanagers operating within the EU willhave to be authorised by a relevantmember state and demonstrate that theyare appropriately qualified to providealternative investment fund managementservices.There is common agreement that further

clarity is needed on a number of centralissues, including depositary liability,delegation to third countries, and leveragereporting. Notwithstanding this, HSBCare pressing ahead with our preparationsfor implementation.As a large universal bank with a

substantial network of sub-custodians,HSBC is exploring how to deal with theliability requirements of the directive buthas an advantage as many HSBC entitiesare acting as sub-custodians. Theoperational complexity and oversightresponsibilities that will be thrust on thedepositary are also being mapped out witha view to meeting AIFMD requirements intime.Another area not properly defined as

yet is the relationship between thedepositary and the prime brokers and thismeans there remain grey areas. While the legislation promises complete

investor protection this will come at aprice; it is virtually impossible toeliminate all risk from a portfolio and thelaw of diminishing returns eventuallytakes over. A depositary does not currentlyprice in the risks assumed under AIFMDliability. Another issue is whetherinvestors wish to have this level ofprotection are or prepared to pay for it atall. Industry representatives in Ireland have

been working hard to highlight theseissues but the primary response has to bethat regulation is coming and there is aneed to practically design workablemodels to implement the requirements forclients. In that respect, it is generallyaccepted that Irelands QIF product isalready considered to meet many of themandatory provisions of the AIFMD.The new rules will appeal to certain

types of investor and many others willinsist on choosing AIFMD compliant

Tony McDonnell

“An expected wave of re-domiciliation from theHurricane Belt has been slow.Instead, managers havefavoured a diversifiedapproach, launching a newproduct in Ireland to enablethem to appeal to the investorthat requires a more regulatedproduct.”

Hedge Fund Administration 13

funds. These include large Europeaninstitutional investors, multinational bankslocated within Europe, pension funds andinsurance funds who are required to seekmaximum protection for their clients for avariety of reasons. While funds will nothave to re-domicile to a European locationto become AIFMD compliant and tap intothis market, many will do so neverthelessand, once again, Ireland is well placed tobenefit from this trend.There will of course be managers who

choose not to market to Europeaninvestors due to the additional cost ofthese regulatory requirements but thisshould not represent a significant threat tocontinued growth in funds administrationin Dublin.

AIFMD is by no means the onlyregulatory change with which the Irishindustry has had to contend, some of themmore high profile than others. Among themore prominent changes was the plannednew corporate structure for Irish SICAVsthat meets United States tick-the-boxtaxation rules but there have been manyother initiatives that have beenimplemented that will also stand toreinforce the regulated environment inwhich Irish administrators operate.One example is the recently published

proposed amendments to the CriminalJustice Act, the CJA Amendments Bill2012, which will give comfort to investorsthat the funds in which they invest,operate within a highly regulatedenvironment and to the highest level ofAML standards. Another example is anEnhanced Fitness and Probity Regimewhereby there is now a requirement forapproved persons to be deemed fit andproper by the Central Bank to performcertain core functions and duties. Theseare enhancements that will benefit anyhedge fund appointing an Irishadministrator, irrespective of funddomicile. The hedge fund industry itself is also

changing and is continuing to movetowards the institutional model, drivenmainly by regulation, risk managementand investor demand. This has led to an

increased appetite for our alternativemiddle-office offering, an area whereHSBC is making significant investment.Managing the changes to the OTCderivative model on the back of the USDodd-Frank Act and the EU’s EMIRprovisions will be key.Similarly, FATCA requires significant

attention for managers and serviceproviders alike and will require additionalsupport with investor classification,withholding and annual reportingrequirements.An ability to fully service managed

accounts is now a basic requirement forany hedge fund administrator, enablingclients to respond to the increasinginvestor demands for transparency. Insuch cases, a cost effective operatingmodel is key and an ability to leverageglobal talent pools represents anincreasingly important component of theoffering.Most of the bigger servicing firms are

broadening their offering rather thanbecoming more specialised. As managersare focusing on producing alpha andmanaging tail risk, they are looking fortheir administrator to provide a broaderoffering (the build-out of middle officeand collateral management services beinga typical example).Outsourcing from the big providers is

more driven by the aim to createefficiencies in the processes, for example,by using offshore locations for processing,vendors for distribution of investorstatements and annual reports. To reducevaluation risk and provide truly

independent pricing, there is probably alsoan increased use of external pricingvendors, along with the development ofinternal pricing capabilities, which onlythe top-tier providers such as HSBC canaccommodate.Further growth opportunities will open

up during the next 12 months due to theveritable tsunami of regulatory changewhich the industry is about to experience.An organisation’s or a location’s ability tomanage that change effectively andengage proactively with its client base onthe impact of those changes will set itapart from the competition. There aresome risks ahead, in particular a risk thatsome managers both EU and non-EU willperceive AIFMD to be too strict and willmove funds to other jurisdictions.However, on balance with regard to thelarge asset allocators, pension funds,insurance companies and other EUinvestors the ‘AIFMD-Ready’ QIFproduct is likely to become moreattractive.That said, it will be vitally important for

the Irish hedge fund industry is to ensureits administrators continue to capturemarket share in the alternatives serviceoffering space. If it can do this it is set tocontinue growing for the foreseeablefuture.

Tony McDonnell is regional head ofthe alternatives sector for Europe andNorth America sales and businessdevelopment at HSBC SecuritiesServices.

FINANCE DUBLIN | SEPTEMBER 2012

“While funds will not have tore-domicile to a Europeanlocation to become AIFMDcompliant and tap into thismarket, many will do sonevertheless and, once again,Ireland is well placed tobenefit from this trend.”

As part of its reaction to solve the puzzle of the causes of the financial crisis the EU isintroducing the AIFMD. The directive poses a risk to Ireland’s hedge fund industry, inparticular a risk that some managers both EU and non-EU will perceive AIFMD to be toostrict and will move funds to other jurisdictions, however it will make Ireland’s ‘AIFMD-Ready’ QIF product more attractive to managers.

RBC Investor Services Limited is a holding company that provides strategic direction and management oversight to its affiliates, including RBC Investor Services

Trust, which operates in the UK through a branch authorised and regulated by the Financial Services Authority. All are licensed users of the RBC trademark

(a registered trademark of Royal Bank of Canada) and conduct their global custody and investment administration business under the RBC Investor Services™

brand name. ® / ™ Trademarks of Royal Bank of Canada. Used under licence. * Trademark of RBC Investor Services Limited.

rbcis.com

YOUR ESSENTIAL PARTNER FOR CROSS BORDER & DISTRIBUTION SOLUTIONSVisit www.rbcis.com to learn more about how we can help you achieve your ambitions.

The Irish SICAV and AIFMD 15FINANCE DUBLIN | SEPTEMBER 2012

Ireland as a jurisdiction is wellpositioned to assist managers impactedby the emergence of the Alternative

Investment Fund Managers Directive(AIFMD) as many of the global leaders incustodial and administration services arelocated here. Ireland also has a regulatoryframework consistent with the directive anda range of investment structures foralternative investment funds (AIFs).The directive has been designed to

regulate heretofore unregulated hedge fundmanagers or alternative investment fundmanagers (AIFMs). One of the difficultieswith the directive is that it does notnecessarily allow for size and scale. Alighter regime is proposed for AIFMs wherecumulative AIFs under management arebelow €100m and for AIFMs withunleveraged AIFs up to a maximum of€500m and subject to 5 year lock-ups. Oncean AIF breaches these thresholds, they aresubject to full compliance with the directiveand managers need to be aware that theymay need to radically reshape theirbusinesses as a result.

As an example, within many AIFMs therisk management and portfolio managementfunctions can be carried out by the sameteam. Under the terms of the directive thesefunctions will now be required to beperformed by persons who are functionallyand hierarchically separate in theorganisation. The same requirements existfor asset valuation and other requirementsare being mandated for regulatory andinvestor reporting. The impact of thesechanges mean that to comply with thedirective, an AIFM’s organisationalstructure may need to change and staffinglevels and outsourcing arrangementsrethought.

Ireland’s readinessIn developing solutions to assist

investment managers navigate some of thedirective's obstacles Ireland has a number ofkey competitive advantages:1)the technology platforms that third

party administratorshave put in placeprovide ‘first class’services toalternatives and inmany cases are alsodesigned to handlemiddle officeprocessing and cashcollateralmanagement. Eachand every type ofinvestment strategy is catered for, all assetclasses and this infrastructure is matchedwith internationally recognised financialreporting standards including US GAAPand IFRS; 2)the Irish regulatory framework is

already aligned with many of therequirements of the directive. For instanceIrish regulated AIFs are already required tohave an independent depositary and arealready administered by entities authorisedand supervised by the Central Bank ofIreland. In respect of the directive, the Irishregulator is expected to ensure that theprovisions of the directive are implementedinto national law without haste. In doing sothe regulator will seek to have existingguidance notes updated to ensure Ireland isready for implementation;3)Ireland operates a simple tax efficient

and transparent framework for AIFs; and4)Ireland offers a significant pool of

industry experienced people already withskills in the operational aspects ofalternative and Irish funds.

AIFMD opportunitiesOutsourcing or delegating functions is

permitted under the directive, provided thatthe AIFM has notified and receivedapproval from their relevant regulatoryauthority. This is capped with a proviso thatthe AIFM cannot delegate out suchsubstance so it becomes no more than aletter box entity.Examples of new opportunities exist in

the creation of a risk management offering,liquidity and leverage computationalservices. These will not necessarily bestraight forward to carry out. In the case ofcertain individual directive requirements,systems may need to be improved, re-designed or even transformed to allowservice providers use existing platforms toprovide such new service offerings. Forexample, should regulatory reporting

required under AIFM be anything likePrivate Fund Reporting mandated by theSEC, chances are that providers will haveapproximately 50 - 60 per cent of the datarequired. To ensure data is in the correctformat, programs may need to be developedto map existing data into regulatoryreporting formats and to do this, providersmay need to hire and/or assign teamsresponsible for these service offerings.For valuation, the directive looks for

functional and hierarchical separation at theAIFM level and while larger managers maybe able to demonstrate this, smallermanagers may struggle. In such cases,outsourcing or delegating the function toone or more external valuation agent(s) maybe considered. An appointed valuationagent would need to demonstrate thenecessary skills and expertise to valuespecific assets and would ultimately assumerisk and possible liability in carrying outthis role. For managers faced with thischoice, finding the right fit from acost/benefit point of view will be achallenge.

Ireland has an excellent reputation forprovision of net asset value (NAV)calculation services for alternatives andcurrently administers 40 per cent of allglobal hedge funds. NAV calculation shouldnot however be confused with the valuationrequirements of the directive where thevaluation of a fund’s individual assets isunder consideration. While there areelements associated with the NAVcalculation process that include priceverification procedures to sources such asBloomberg, IDC and other well known dataproviders, these stop short of independentlyassigning a value across different assettypes and classes.

DepositaryThe single most controversial aspect of

the directive concerns the depositary andtheir role and responsibilities. The directiverequires the appointment of depositaries for

The new Irish corporate structure: the iCav will solve UStax problem for Irish PLCsFERGUS MCNALLY of Ernst & Young looks at the new services and offerings that seek to commercialise opportunities asa result of the Alternative Investment Fund Managers Directive.

Fergus McNally

'The impact of these changesmean that to comply with thedirective, an AIFM’sorganisational structure mayneed to change and staffinglevels and outsourcingarrangements rethought.'

“In the case of certainindividual directiverequirements, systems mayneed to be improved, re-designed or even transformedto allow service providers useexisting platforms to providesuch new service offerings.”

The Irish SICAV and AIFMD16 FINANCE DUBLIN | SEPTEMBER 2012

structures that previously have operatedwithout them. Under the directive, theobligations of a depositary are to ensurethe proper monitoring of cash flows;perform safekeeping of financialinstruments and other assets belonging tothe AIF, and to carry out a number ofmonitoring and oversight tasks. Out of all the text in the directive, it is

the matter of depositary liability that hascaused the most debate. Under thedirective a depositary is, as a general rule,liable to an AIF or its investors for the lossof financial instruments in its custody. Thedepositary will not however be liablewhere it can prove that the loss has arisenas a result of an external event beyond itsreasonable control, the consequence ofwhich would have been unavoidable. Under the directive, an AIF appoints one

depositary and it is the depositary’sresponsibility to oversee any furtherrelationships. The directive allows for thedelegation of safekeeping duties to a thirdparty, which will allow the continuance ofmultiple Prime Broker (PB) relationships.Notwithstanding multiple PB relationships,

under the directive it is the AIF’sdepositary that will ultimately be liable ifsomething goes wrong. The attraction of the multi-PB model has

enabled managers to spread risk andmaintain secrecy over individual tradingstrategies. Each individual PB operating asa custodian of sorts for certain clientassets, providing leverage and margin asrequired, allowing a fund to borrowsecurities to sell short and generatinginvestment research that clients may use tosupplement their own trading programs.The assignment of ultimate responsibilityto the depositary under the directive maycause a shift in the balance of power andlead to additional considerations aroundthe appointment of PBs to AIFs. There willalso be a learning curve associated withhow these relationships are managed.In Ireland, the requirement to appoint a

depositary for non-UCITs funds alreadyexists, together with work practices overthe oversight and management of PBrelationships. Certain nuances will need tobe ironed out, but from a regulatory point

of view, Ireland’s framework is broadlyconsistent with the directive.

Marketing and distributionThe ultimate goal of the directive is to

protect end investors and guarantee certainpractices. It therefore follows that havingan AIFM brand or accreditation will bringwith it a certain amount of respect and mayassist with ‘branding’ for capital raisingpurposes. AIFMD compliant products willalso be afforded the ability to passportacross the EU similar to UCITS whichopen new distribution routes for managers.Following transposition of the directive

it is likely that new questions will appearon investor due diligence programs,enquiring as to how an investment managerconforms with certain provisions of thedirective (be they regulated or not).Investors will always be attracted byhistoric absolute returns, however intoday’s market they also want to seeappropriate security measures in place andnot be duped by a future fraud. Today, some investors seek this

protection through the establishment ofsingle segregated managed accounts. In anAIFMD compliant environment, some ofthese careful investors might be satisfied toinvest directly in a core fund, safe in theknowledge that they are afforded certainguaranteed practices, transparencies andprotections under the directive. From afund managers viewpoint this will helpeliminate duplicity of process, increasedcosts and explaining unforeseen trackingerrors. With registration required for AIFMs in

July 2013, many EU and non-EUmanagers are reviewing their productranges as they figure out what type (if any)offering they want to propose to complywith and considering whether they want toor need to register. Ireland is well placed for an AIFM

compliant product with it’s currentQualifying Investor Fund (QIF), whichallows a flexibility of investments, while atthe same time subjects the fund to a highstandard of regulatory requirements inIreland.Furthermore, recent legislative changes

such as those allowing a non-Irish fund tomigrate to Ireland without changing theircorporate structure have certain taxbenefits. Solving the problem of an IrishPLC not being able to 'check the box' forUS tax purposes, is also being resolved,with the Irish Legislature committing tohave in place new legislation at thebeginning of 2013 that will allow theestablishment of a new Irish CorporateVehicle, the 'iCAV', which is not a PLC.Should this iCAV elect its classification

under US 'check the box' tax rules, it willavoid certain adverse tax consequences.The inclusion of the iCAV within Irishlegislature certainly increases the variety ofstructures available to Ireland, and ensureswe are not at a disadvantage vis a vis otherjurisdictions.For non-EU managers avoiding possible

dual regulatory oversight in the EU as wellas in their home country is a consideration.For non-EU AIFMs, the directive imposesrequirements to ensure that yourinvestment management activities aresubject to equivalent standards ofregulatory oversight and supervision in theAIF's home country as would berequired/mandated in the EU under thedirective. Some managers considering thisare contemplating whether or not theestablishment of an internally managed EUAIF might solve this potential headache.Internally managed fund structures havebeen used frequently in the past for bothIrish QIFs and UCITS vehicles. As itstands, these entities have been able,through their board of directors, to delegatemuch of their activities including portfoliomanagement functions to managers injurisdictions based outside the EU. It’sreasonable to expect that the directive willnot be stricter than UCITS on this and willfollow established UCITS practices on thesupervision of delegated tasks.Ireland is ready for AIFMD, the

sophistication, international depth of theplayers located here, their know-how,resilience and commitment to change willensure that Ireland continues to strengthenas a domicile and service centre foralternatives. Additionally, Ireland offers achoice of appropriate tax efficientproducts/vehicles for AIFs and theregulatory background and oversightregime to ensure that the implementationof the directive will be effective.Commercialising the opportunitiesassociated with the directive may be achallenge and being able to articulatescope increases in services and newofferings will be important to stay in thegame.

Fergus McNally is an associate partnerin financial services in Ernst & Young.

“The inclusion of the iCAVwithin Irish legislaturecertainly increases the varietyof structures available toIreland, and ensures we arenot at a disadvantage vis a visother jurisdictions.”

“Ireland is well placed for anAIFM compliant product withit’s current Qualifying InvestorFund (QIF), which allows aflexibility of investments, whileat the same time subjects thefund to a high standard ofregulatory requirements inIreland.”

1904CITI FUNDS THE PANAMA CANAL.

1812CITI OPENS IN NEW YORK.

1977CITI PIONEERS THE ATM.

Since our beginning in 1812, we’ve been privileged to support some of the biggest ideas in modern history. And we want to thank all of our clients and employees who, over the centuries, helped conceive and make them happen. Your ideas, ingenuity and passion have made the world a better place.

Visit citi.com/200

ONE BANK. TWO CENTURIES.

AND MILLIONS OF THANKS.

2011CITI IS THE FIRST CARD IN

GOOGLE WALLET.™

1958CITI BACKS THE

COMMERCIAL JETLINER.

1866CITI FUNDS THE FIRST

TRANSATLANTIC CABLE.

© 2

012

Cit

igro

up In

c.

Cit

i and

Arc

Des

ign

is a

reg

iste

red

serv

ice

mar

k of

Cit

igro

up In

c.

ONE BO CENTURIETWAND MILLIONS

OF THANK

ANK..SO CENTURIE

AND MILLIONS.SOF THANK

ou

p In

c.

ou

p In

c.f

Cit

igr

e m

ark

oer

vic

ed s

erteg

issi

gn is

a r

e been privilegedv’e12, we our beginning in 18Sinct idesf the biggeome ot so support

o thank all ot tane w. And worythiser the cs whoand emplo

e been privilegedas in modern t ide

s tf our clieno thank all o, helped uriet

ou

p In

c.0

12 C

itig

r©

2si

gn is

a r

c D

eC

iti a

nd A

r

ener the cv, os whoeeyand emploe them happen. Ye and makeivoncc

e made the wvsion haasy and pingenuit. eer placttbe

002om/cisit citi.V

, helped suriet, asour idee them happen. Y

orld a e made the w

Company Profile: RBC Investor Services18 FINANCE DUBLIN | SEPTEMBER 2012

RBC Investor Services is a premier provider

of investor services to asset managers,

financial institutions and other institutional

investors worldwide. Our unique approach

to domestic and cross-border solutions,

combined with award-winning client service

and the expertise of 5,500 professionals in

15 markets, helps our clients achieve their

ambitions.

RBC Investor Services ranks among the

world's top 10 global custodians with USD

2.7 trillion (CAD 2.8 trillion) in client assets

under administration and is a wholly-owned

subsidiary of Royal Bank of Canada, one of

the largest and most financially sound banks

in the world.

Our complete range of investor services is

supported by:

• a worldwide network of offices in 15

countries on four continents

• award-winning European transfer agency

capabilities

• fund administration services in 13 global

markets

• strong credit ratings: A2 (Moody’s), AA-

(S&P)

• more than 100 years of experience in

institutional financial services

• products and technology that meet our

clients’ evolving needs

• top ratings for client service in industry

client satisfaction surveys

Services offered

RBC Investor Services’ innovative solutions

include global custody, fund and pension

administration, shareholder services,

distribution support, securities lending and

borrowing, reconciliation services,

compliance monitoring and reporting,

investment analytics, and treasury services.

We partner with our clients, using our

insight, global reach and commitment to

excellence to enhance their business results

– in the areas that matter most.

Commitment to excellence

We take pride in our commitment to deliver

nothing less than excellence in everything

we do.

Our investments in best-in-class client

management tools, in long-term

relationships with leading suppliers, and

our advanced onshore and offshore fund

servicing capabilities - these are only a

starting point for delivering the day-to-day

capability that our clients require to

support their business. Through our in-

house quality standards process, by in-

depth client consultation and reviews, and

by developing innovative products and

services to meet clients’ needs, our goal is

to continuously deliver exceptional client

experiences.

In highly competitive global markets

financial institutions need efficient and

cost effective asset servicing solutions

to maximise results. At RBC Investor

Services, our whole business approach

is geared to exploring, developing and

implementing solutions to enhance

services to your business and your

investment clients. Our local, offshore

and onshore expertise, coupled with our

global reach and operating model, can

help you access new markets, develop your

business and succeed in delivering highly

cost efficient and effective solutions to

your clients.

Global reach

In-depth expertise in global markets is critical.

Our institutional client base includes some of

the world’s leading asset managers, pension

plans and insurance companies. And our

market insight, complemented by our

extensive range of investor products and

services can help you maximise your

operational efficiency, minimise risk, add

value to your clients and optimise your

financial benefits. Our global capability and

partnership approach also allows us to support

your market and product expansion and

enhance the service model to your clients -

whichever international markets you choose

to operate in.

RbC Investor Services in Ireland –

alternative investments and offshore

expertise

As part of a global solution suite, RBC

Investor Services Ireland offers extensive

expertise in the provision of high quality,

client focused custody and administration

solutions to a wide range of sophisticated and

mainstream schemes. Examples of these

include the following: UCITS and non UCITS

Fund Structures, Structured Products,

Alternative Investment Funds, Multi Manager

Funds, Pooled Funds, Liquidity Funds, Fund

of Funds and Fund of Hedge Funds.

RBC Investor Services: a leading investment serviceprovider with true global reach

As part of a global solution suite, RBC’s Investor Services offers extensive expertise in theprovision of high quality, client focused custody and administration solutions to a wide rangeof sophisticated and mainstream retail and institutional collective investment schemes.

For more information contact: Mark Thorne. Dillon Eustace,33 Sir John Rogerson’s Quay,Dublin 2. Tel: +353 1 667 0022Fax: +353 1 667 0042 mark.thorne@dilloneustace.ie

At Dillon Eustace our many years of experience mean we can provide clear, focused advice, without ever losing sight of the bigger picture. We offer national and international corporates, banks, asset managers and insurers our expertise in:

...see the wood

We can...

Corporate Governance20 FINANCE DUBLIN | SEPTEMBER 2012

Risk management strategies for investment fundsAs the supervisory environment becomes more complex and with the introduction of new regulations such as UCITS Vand AIFMD, investment funds will need to put a particular emphasis on risk management. LUKAS ZIEWER of KPMG looksat risk management strategies.

There are several macro-trendssupporting the continued growthand success of the investment-funds

industry at the upper end of thecomplexity scale. In particular, ageingsocieties need suitable vehicles to managethe flow of financial savings and providesavers with measurable upside potentialand downside protection over the lifetimeof the investment.Related to this trend is that many

institutional investors such as insurers andpension funds - in their attempt to focustheir own resources where they have acompelling competitive advantage - arelooking for ways to outsource mandatesfor certain investment classes andstrategies in cost efficient ways.While the economic environment is

supportive, the supervisory environment isbecoming stricter and more complex,mostly as a consequence of the financialcrisis.

To protect the stability of the financialsystem, regulators will increasingly focuson funds’ investment strategies, leverageand inter-connectedness with the globalfinancial industry. This brings funds withalternative investment strategies, which sofar operated in a relatively benignregulatory environment, much more intothe focus.At the same time, the cost of failure is

high and rising. We have recently seen anumber of unusually high penalties forfailures to comply with supervisoryrequirements which were caused byoversight and a lack of attention to detail.Such examples are live evidence of theCentral Bank of Ireland’s commitment tointrusive supervision and strictenforcement. With the presence ofinternational alternative-investment fundsin this country, the Irish supervisor will beexpected to step up and take a central rolein managing systemic risk in this globalsector.Consistent with developments across

the financial sector, regulation willincreasingly require funds to manage theirrisks in a moreformalised andintegrated way; bothUCITS V andAIFMD containadditionalrequirements for therisk management ofinvestment funds.Also, more andmore information ona fund’s risk profilewill need to be reported to investors andthe CBI. Ensuring the robustimplementation of these requirementsneeds to be a top priority for funds’boards.Risk management for investment funds

has typically been focused on theinvestment manager’s risk/returnconsiderations, and the management oflegal and tax compliance. However, this isnot enough to meet the futurerequirements, and funds’ boards need todevelop broader strategies for how theoverall risk profile is being managed.Developing a risk framework starts with

a determination of risk appetite in all itsdimensions. For an investment fund, thereare a number of stakeholders that theboard needs to consider, in particular itsinvestors, the investment manager andother business partners, and thesupervisor. The investors’ risk appetitewill be dominated by the fund’sperformance in line with the mandate, notonly in ‘normal’ times but also in stressscenarios. However, this is broader thanpure investment performance; investorsare also concerned with the developmentof the fund’s cost base, and also in manycases with the fund’s adherence to aninvestment theme such as sustainability or‘ethical investments’.The risk appetite from the perspective

of the investment manager and otherbusiness partners are dominated by theircommercial interest to provide continuedservices to the fund and source asustainable stream of fee income from it.Also, the investment manager will look touse the franchise that is being developedwith the fund to launch additional vehiclesand grow assets under management.The risk appetite of the CBI as the

supervisor will be determined by its

objectives to protect financial stability andmarket conduct. Historically, the focus hasbeen on market conduct and consumerprotection, which for alternative-investment vehicles had been of limitedrelevance. However, now financialstability has come under greater scrutinyin particular for alternative-investmentsfunds, and the CBI will take its role inensuring global financial stability veryseriously indeed.In parallel to clarifying the risk appetite

of different stakeholders, the board needsto have available a register of all thesources of risk that the fund and itsstakeholders are exposed to. Whileinvestment risks are the most obvious andtypically the biggest risks, investmentfunds are exposed to significant otherrisks, in particular liquidity, counter-partyand operational risks.

In particular operational risks aretypically diverse, and include a long listcontaining, for instance, risks associatedto IT, third-party outsourcing, and theperformance of contract indemnities andprotections; not mandated trades (roguetraders and ‘fat finger’); errors invaluations, models and NAV reporting;and errors in filings, disclosures, andnotifications to the CBI.In order to make risk manageable, risk

appetite needs to be quantified. Theinvestment manager’s Value-at-Risk (VaR)numbers are relevant, but the fund’s boardneed to look at other metrics as well.In particular, funds will need to look at

the loss potential in stress situations,including liquidity stresses in key marketsegments and counter-party defaults;sensitivities for key assumptions andmodels of the investment manager;systemic risk, in particular its inter-connectedness through leverage,

Lukas Ziewer

“Developing a risk frameworkstarts with a determination ofrisk appetite in all itsdimensions. For an investmentfund, there are a number ofstakeholders that the boardneeds to consider...”

“In order to make riskmanageable, risk appetiteneeds to be quantified. Theinvestment manager’s Value-at-Risk (VaR) numbers arerelevant, but the fund’s boardneed to look at other metricsas well. In particular, fundswill need to look at the losspotential in stresssituations...”

Corporate Governance 21

derivative contracts, and fundingarrangements; and various operational keyrisk indicators, which help to quantifyoperational risks, and may be based oninvestment consultant/advisor feedback, arecord of ‘near misses’ etc.Finally, as the board has described and

quantified the fund’s risk appetite, it willneed to ensure adequate monitoring, andtimely intervention in the event of adversedevelopments. In particular, it will need toensure that it has at all times full visibilityof all the metrics and indicators how thefund’s current risk profile relates to therisk appetite.The board also needs to be sure that

their view of risk is synchronized withwhat is being reported to the CBI; giventhe gravity of potential repercussions,there needs to be a ‘zero-tolerance’ policyfor errors and lapses in communicationwith the supervisor.In practice, the actual ‘doing’ of risk

monitoring and mitigation will beperformed by the investment manager onbehalf of the fund’s board.While this is justified for practical

reasons, the fund’s board need to retainownership of the outcome. In the firstinstance, this is achieved through theboard’s ownership of the risk framework,rather than relying solely on the picture asit presents itself through the eyes of the

investment manager.In addition, boards need to implement

safeguards. These can include the periodicvalidation of valuation and risk models;periodic review of the scenarios andassumptions used in stress testing; andengaging with the investment manager in

‘themed’ investigations into certain riskexposures, such as a rogue trader, counter-party concentrations, and the systemicimpact of failure.

Lukas Ziewer is head of financial riskmanagement with KPMG in Ireland.

FINANCE DUBLIN | SEPTEMBER 2012

Let our experience enhance yours

With over 25 years of international experience, Hainault Capital specialises in providing bespoke pragmatic

assistance to cross-frontier businesses, ranging from large financial services institutions to emerging hedge

fund managers, from AIM listed companies to family offices. Our clients have also included financial

regulators and governments on three continents.

In particular we advise and assist on international investment funds, investment managers, structured finance, corporate

governance and regulation.

For further information contact info@hainaultcapital.com, or Peter O’Dwyer at +353-1-637-3936

Hainault Capital Limited, 26 Pembroke Street Upper, Dublin 2, Ireland25 y

ears

Investment funds

Corporate governance

Independent directors

Regulatory advice

Fitness and Probity

Distressed funds

Work outs & wind downs

AmL

Expert witness

Risk management for investment funds has typically been focused on the investmentmanager’s risk/return considerations, and the management of legal and tax compliancesays Ziewer, but to meet the future requirements this will not be sufficient and funds’boards will need to develop broader strategies for how the overall risk profile is beingmanaged.

Irish Regulatory Regime22 FINANCE DUBLIN | SEPTEMBER 2012

PRISM regulatory approach differentiates degrees of riskand provides a proportionate approach

DONNACHA O'CONNOR of Dillon Eustace analyses the European and domestic regulatory response to the financial crisis.He pinpoints the introduction of a single European rule book as well as the Central Bank's focus on governance and itsnew risk-based supervisory approach, PRISM (Probability Risk Impact SysteM), as key developments.

The financial crisis exposed thefailure of supervision of thefinancial sector in many countries,

including Ireland. There has been anunderstandable criticism of the privatesector and the regulators and theirrespective roles in the crisis. The crisisalso exposed weaknesses in the EU anddomestic legal and institutionalframework in which regulators operated.Fundamental changes have been made tothe laws governing the EU financial sectorand to the institutional infrastructureunderpinning European financialregulation and supervisory practices.Within this EU framework, Ireland’s lawmakers and regulators have taken anumber of steps to change the way inwhich firms are regulated.

There were a number of short-comingsin the European system of financialregulation which were identified duringthe crisis. There was an absence ofmonitoring of systemic risk at a domesticand European level, as well as a lack ofspecific regulation and transparency inrelation to certain systemically relevantaspects of the financial system. Theseincluded the activities of offshore funds,securitisation vehicles and rating agencies,as well as the operation of the OTCderivatives market and of remunerationstructures within financial firms. Inaddition, the rules set out in certain corelaws, such as the Capital RequirementsDirective (made up of Directives2006/48/EC and 2006/49/EC, asamended), the basic purpose of whichwere to ensure the financial soundness ofcredit institutions and investment firms,were ineffective in preventing firms fromfailing.There was also an absence of a coherent

set of rules acrossthe EU (the so-called singleEuropean rule book)due to variations inthe transposition ofEU Directives,ambiguities or gapsin the rules,exceptions made,derogations grantedor gold-plating of EU rules by individualMember States. Several Directives leftMember States significant options anddiscretion. The Lamfalussy committees ofsupervisors (the predecessors of the threenew European supervisory authorities)were only able to issue non-bindingtechnical standards which were oftenignored by national regulators.In response to the crisis, the European

Council adopted new rules to reform theEU framework for the supervision of thefinancial system and a plethora of new orrevised financial laws are in the process ofbeing enacted.The two pillars of the new EU

supervisory framework are the EuropeanSystemic Risk Board (ESRB) and theEuropean System of Financial Supervisors(ESFS). The ESRB is broadly responsiblefor macro prudential supervision and theESFS, which is made up of an integratednetwork of European financial supervisorsworking with three new supervisoryauthorities, the European BankingAuthority (EBA), the European Insuranceand Occupational Pensions Authority(EIOPA) and the European Securities andMarkets Authority (ESMA), is broadlyresponsible for micro prudentialsupervision. The powers of the EBA,EIOPA and ESMA now include thedevelopment of binding technicalstandards and interventions relating to thesupervision of individual firms in certaincircumstances.In Ireland, at the institutional level, the

Central Bank Reform Act, 2010 abolishedthe separation between central bankingand financial regulatory functionsintroduced in 2003 and the Central Bankof Ireland is now also responsible formaintaining the stability of the financialsystem and the proper and effectiveregulation of markets and financial

service providers. This 2010 law andsubsequent legislative enactments havegiven the Central Bank enhancedsupervisory and enforcement powers. Oneof the key tenets of Central Banksupervisory policy is to promote strongand effective governance. To this end theCentral Bank has issued or endorsed anumber of industry specific corporategovernance codes containing requirementsin relation to Board composition,independence of Directors, attendance atmeetings and other matters.The approach to supervision in Ireland

has also changed. Principles basedregulation has been replaced by a riskbased supervisory approach known asPRISM (Probability Risk Impact SysteM).This focuses the most resources on firmsconsidered to have a potentially highsystemic impact on the financial systemand a high risk to the consumer. WhilePRISM is intended to result in a commonbasic approach to regulation across allfinancial sectors, it is also intended toidentify where risk is concentrated mosthighly within the financial system.Furthermore it differentiates betweentypes and degrees of risk in differentfinancial sectors and so avoids aninvestment fund being regulated to thesame degree as a bank or insurancecompany for example.The Central Bank’s enforcement

strategy is to engage in ‘pre-definedenforcement’ which concentrates on highimpact areas such as market conduct,consumer protection and financial crime,focussing on firms with significantmarket share, and ‘reactive enforcement’which is event or report based, and tooperate in a proportionate, consistent,targeted and transparent manner.EU institutional reforms and

particularly the introduction of a singleEuropean rule book can be expected tostrengthen the integration of EU financialmarkets. Additionally, Ireland’s ownregulatory reforms are likely to boostconfidence in its financial sector andincrease the appeal of Ireland as afinancial centre and gateway to the EU.

Donnacha O'Connor is a partner atDillon Eustace.

Donnacha O’Connor

“The Central Bank’senforcement strategy is toengage in “pre-definedenforcement” whichconcentrates on high impactareas such as market conduct,consumer protection andfinancial crime, focussing onfirms with significant marketshare.”

Irish fund products facilitate a wide range of investmentmandatesThe flexibility of Ireland's fund regime is the overriding theme in its success as a fund servicing domicile writes ADRIANWHELAN of Brown Brothers Harriman. The adaptable service provision and regulatory environment promotes innovationand products that meet global investor appetite, he says.

Fund Distribution24

With assets of Irish domiciledfunds breaking through the €1trillion mark, a gain in UCITS

market share, and net inflows outstrippingthe next nearest domicile in 2011, thequestion is not whether Ireland is asuccessful fund distribution channel forglobal fund promoters but rather, why?

The universal plug‘Adapt or perish, now as ever, is nature's

inexorable imperative’ - HG Wells

The Irish domicile acts as conduit forglobal investment into regulated funds. Acolleague of mine recently described itvery succinctly as being like a universalplug, meaning you can connect with theworld, no matter what region you areplugged into. Irish fund structures arefully mobile and very adaptable.The reasons for the success of the

domicile are neither exhaustive norspecific; moreover the success factorscannot be said to be exclusive to Irelandsince many of the elements are mirroredin other regulated fund domiciles, inparticular Luxembourg which also acts asa hub for fund investment from Asia,Middle East and Latin America. It’s fair tosuggest a form of healthy competitionbetween these two primary fund domicilesserve to offer choice to global assetmanagers which serve to ensure theevolution and development of globallydistributed fund products.Importantly, one can point to flexibility

as the overriding theme. This flexibility isproven by the wide range of investmentmandates that are capable of beingfacilitated through UCITS or QIFproducts. Further, the adaptable serviceprovision and regulatory environment inthe Irish fund industry promotesinnovation and products that addressinvestor appetite regardless of investordomicile.This flexibility is strongly underpinned

by robust levels of oversight frompractitioners and the Central Bank ofIreland which give comfort to fund buyersand foreign regulators alike. This isevidenced, for example, by certain Asian,Latin American and Middle Easternregulators who formally acknowledge theUCITS structure. When product flexibilityis combined with a strong governance

infrastructure theresult is positiveperformance andoutcomes forpromoters and theirclients. This UCITS'badge of honour'has resulted insignificant andgrowing asset flowsto Irish funds fromthese regions.From a client alignment perspective,

BBH believes that it is critical to partnerwith clients on distribution strategy. Ourperspective includes expertise in fundstructures and their respective attributes asthey pertain to the specific desired clientoutcome. We believe that BBH providethoughtful commentary on applicableregulatory matters and the nuances ofparticular jurisdictions, and we align thisperspective with operational support andplatform stability that drives efficienciesto our clients globally. Client distributionstrategies drive our own approach toservicing and our global service modelhas evolved and advanced to match theincreasingly global nature of our clientsbusinesses.

Execution must match ambition‘Ambition never is in a greater hurry

than I; it merely keeps pace withcircumstances and with my general way ofthinking’ - Napoleon Bonaparte

Most UCITS managers plan forexpansion into multiple regions at somepoint and it is obviously critical that suchambitions are married with solidexecution. This is where the capabilities ofIrish service providers play a critical role.An illustrative example is found given therapidly increasing number of investorjurisdictions transfer agents must dealwith greater cross-border distribution, aswell as multiple products, fee types,commission structures, distributionchannels and investor groups. In additionto providing core processing, transferagents’ services have evolved to includecomplex fee calculation, tailoredshareholder servicing, customized andflexible data reporting, and distributionsupport. A striking example of the global success

of UCITS is the fact that 70 per cent ofauthorised funds in the main hubs of HongKong, Singapore and Taiwan arestructured as UCITS. One of the moreinteresting recent product developments inAsia has been the addition of Renminbidenominated share classes to fundofferings matching the global investorappetite for Renminbi exposure with theChinese goal of internationalisation of thecurrency.Moreover, second mover advantage is

quite noticeable in the region. Asuccessful investment strategy andmarketing campaign of last year may oftenbe either replicated or improved upon by aslicker or larger player to take advantageof positive sentiment attached to aparticular 'recent winner.'

The Middle East is obviously anattractive region for the sellers of funds.Whilst Shariah compliant funds remainimportant in the region, our experiencehas been that more evident asset flowsfrom the Middle East in recent times havebeen to asset classes ranging from fixedincome to real estate, but most evidentlyto passive strategies index trackers andETFs. The appetite for passive and ETFtype products from the region is large.Interestingly, the first Abu Dhabi basedfund promoter to launch an Irish UCITSscheme was authorised last year to launcha range of ETFs into the market, whichwas a prime example of theinternationalisation of Middle Easterninvestment managers into the UCITSmarket.Despite the well known dynamic of

Chile, Irish funds have done extremelywell in tapping into certain LatinAmerican fund channels. Much of thissuccess is driven primarily by the fact that

FINANCE DUBLIN | SEPTEMBER 2012

Adrian Whelan

“When product flexibility iscombined with a stronggovernance infrastructure theresult is positive performanceand outcomes for promotersand their clients. This UCITS'badge of honour' has resultedin significant and growingasset flows to Irish funds fromthese regions.”

Fund Distribution 25

many Latin American governments haveprivatised their government pensionplans, Administradoras de Fondos dePensiones (AFPs). These large andaccessible pools of capital have a naturalaffinity and historic track record ininvesting into UCITS schemes and thishas been matched in recent times by otherinstitutional investors in the region also.BBH has a leading market share as

global administrator servicing LatinAmerican corporate and pension funds.Our relationships with the largestallocators to offshore funds drive insightson these markets to our clients whodistribute Irish product into thesemarkets. A distinct trend we have noted inrecent times is that wealthy non-residentAmericans based in the Latin Americanregion are an investor group targeted bymany of the larger Irish fund promoters.This pool of assets is normally targetedthrough distribution agreements withFloridian and surrounding area wealthmanagers.

The road less travelled‘There are no foreign lands. It is the

traveler only who is foreign’ - RobertLouis Stevenson

Another key component of geographicexpansion is the fact that like anyjourney into the unknown, with suchadventure brings an additional amount ofdownside risk and challenges. One of themost visible themes of the recent raft ofregulatory repapering is the fact thatmany of the headline regulations areactually multi-jurisdictional. Conceptssuch as FATCA, UK Retail DistributionReview, AIFMD, and Volcker Rule donot just have local impact, but reachacross borders and touch on the variousaspects of a fund promoter globalstrategy.BBH has deployed dedicated resources

to continuously monitor and assessregulatory developments. We keep ourclients informed by communicatinginteractively with them throughout theprocess. Our goal is to establish a cultureof awareness and thoughtfulness as tomarket and regulatory developments anddrive value to our clients.Each of the key markets in Latin

America, Middle East and Asia havenuances, specific local registration orcompliance requirements and certainmarket participants or decision makerswho play essential roles in distribution.

BBH’s view is to sensibly share ourexperience with clients in order to enabletheir success.

The future?‘Study the past, if you would divine

the future’ - Confucius

It is our belief that Irish funds willcontinue to evolve and expand generallyinto the future. A significant portion ofthis future growth will come from theseparticular territories. As in the past, ourindustry will adapt and innovate tomatch the growing complexity andmarket demand in terms of facilitatingfund flows and product developmentfrom new and existing investor channelsand growth markets. Great change bringschallenges, as well as opportunities, andthe extensive global reach of the Irishfunds industry is ideally positioned tocontinue to drive value to its diverse andwide ranging client base within theglobal market.

Adrian Whelan is a relationshipmanager at Brown BrothersHarriman.

FINANCE DUBLIN | SEPTEMBER 2012

funds europe

awards2011

European Advisor

awafunds eueufunds

2011ardsuropeurope

d

European

AdvisorEuropean 2011

The recent aquisition of Complementa has enhanced StateStreet’s data management services

SUSAN DARGAN of State Street outlines the services currently available for data management outsourcing partnershipsand the benefits of using these services.

Data Management26

Changes sweeping across theinstitutional investment andregulatory landscape pose

profound implications for datamanagement. As investors develop newapproaches to asset allocation and riskmanagement, their demand for enhancedinformation is accelerating.Compounding this challenge for assetmanagers are the many regulatorydirectives now emerging that includeadditional reporting and recordkeepingrequirements. As a result of these changes,asset managers can foresee increasedpressure on costs and operating models.The mounting need to achieve efficienciesin their overall operations is driving manyfirms to consider innovative options,including strategic partnerships withservicing providers that can deliverscalable, outcome-driven solutions. Today's growing focus on data

management stems largely from theinvestor- and regulator-driven pursuit ofgreater transparency and risk awareness.Responding to a difficult investmentclimate, Europe's pension funds, insurersand sovereign wealth funds are revisingallocation strategies to accommodate abroader range of asset classes. They arealso adopting more robust methods formanaging risk in a volatile low-returnenvironment. To support these efforts tobalance risk and reward, investors seekhigh-quality data to guide them. Amplifying this trend, incoming

directives contain significant newreporting and record-keepingrequirements. For example, the Markets inFinancial Instruments Directive (MiFIDII) will have far-reaching implications thatinclude changes in client categorisationand best execution rules from 2014. Inresponse, asset managers may be obligedto develop and target products morenarrowly at specific types of investors.Another example is Solvency II which

is scheduled to come into effect in January2014. It calls on insurers to provide farmore rigorous and expansive data toregulators than ever before. Althoughinsurers have become good at gatheringliability data over the years, Solvency IIputs an increased need for them to focuson high quality asset data too. The knock-on effects will be felt by asset managerswho manage assets for insurance

companies, as theywill be required toprovide moregranular data oninvestments heldwithin portfolios.

Client ReportingDemandsThe gravity of the

upcoming datamanagement challenge emerged stronglyin a new State Street survey of Europeanasset managers conducted by theEconomist Intelligence Unit. Withresponses from more than 160 assetmanagers in 25 European countries, thesurvey was an opportunity to assess thestate of the industry at a critical point inits evolution. When asked to identify thebiggest data management challengesfacing them today, 49 percent of assetmanagers highlighted the provision of ahigh level of detailed and quality data toclients (see chart). In addition, theyrecognise that these demands will putsignificant pressure on their existinginfrastructure, with 44 per cent sayingthey would struggle to achieve sufficientscale with their in-house systems todeliver on the data managementchallenges ahead.In the face of mounting complexity and

growing reporting burdens, the benefits ofleveraging the scale and expertise of third-party providers through outsourcingpartnerships look increasingly attractive.After several years of difficult marketconditions, when asset managers haveundertaken many of the easier cost-savingmeasures, they must now look to moreradical solutions. For example, they arelooking to the advantages of single-platform infrastructures and centraliseddata management systems, often replacingmultiple systems inherited throughacquisition. While it has been possible toavoid the challenges of such projectsduring boom times, the current cost-conscious and risk-averse climate givessuch undertakings a new urgency.Streamlined platforms provide aconsolidated picture of global exposurefor reporting to investors and regulators,possibly at a lower cost. Furthermore,these platforms offer the flexibility andagility needed to launch new products

quickly as asset managers seek to growthrough innovation. Costs to develop,maintain and upgrade new infrastructure,however, can be daunting.The operational challenges of data

management are just one driver of theincreasing trend toward outsourcing.Managers’ preparedness to outsourceextends right through the investment valuechain, comprising not simply the back andmiddle office but increasingly front-officeactivities, too, where there may be scopeto outsource virtually everything beyondcore investment decisions. Increased reporting and compliance

burdens that add to the complexity of data

management certainly represent importantfactors in the decision to partner withexternal providers.Outsourcing enables asset managers to

delegate these and other keyadministrative responsibilities thatthreaten to distract them from their coreinvestment focus. At the same time,managers recognise that they may need toinvest substantially in expertise andtechnology to keep pace with evolvingcompliance requirements over the longerterm. While the largest asset managersmay have the scale to absorb thisinvestment, other firms will viewoutsourcing as a compelling opportunityto benefit from the resources andefficiencies of scale of a third-partyprovider.With this in mind, leading providers are

continually seeking to add newcapabilities that deliver on theincreasingly complex needs of assetmanagers and asset owners. With therecent acquisition of Complementa

FINANCE DUBLIN | SEPTEMBER 2012

Susan Dargan

“Today's growing focus ondata management stemslargely from the investor- andregulator-driven pursuit ofgreater transparency and riskawareness. Responding to adifficult investment climate,Europe's pension funds,insurers and sovereign wealthfunds are revising allocationstrategies to accommodate abroader range of assetclasses.”

Data Management 27

Investment-Controlling AG, an investmentperformance measurement and analyticsfirm based in Switzerland, State Street,for example, has enhanced its existingcapabilities in this sphere. Complementais a recognized leader in the precise andindependent consolidation of assets,performance measurement and investmentcontrolling for institutional and largeprivate investors.

Effective data management - an assetmanagement necessityWith a rising focus on risk, effective

data management has become a necessityfor asset managers, investors andregulators. Indeed, with 42 percent ofrespondents to the State Street surveyrating their ability to capture and reportregulatory data as only adequate, it alsoposes significant challenges. In additionto the regulatory requirements, investorsexpect to gain a consolidated picture oftheir assets, a task made vastly moredifficult by today's more complex globaland derivatives-heavy investmentportfolios. Only robust data managementcapabilities can produce the answersinvestors demand, with the memory of thefinancial crisis still fresh in their minds.As a result, data management now plays

a central role in the integrated solutions

for assessing risk and performance thatcan help managers to maximise returns ina more risk-controlled environment. Farmore than a record-keeping function, ithas become an essential element on thefrontier for investment analytics,addressing the defining dilemma for assetmanagers in today's climate, namely theneed to drive enhanced returns in a worldmore risk-averse than ever. As asset managers consider outsourcing

among their data management options,they also recognise that asset servicingorganisations — with their geographic

breadth and local expertise — representvaluable sources of insight into ways tostreamline their operations or refine theirproduct offerings. Thus, whethersupporting key reporting activities,helping to manage risk, or enablingmanagers to seek new markets andinvestors, servicing providers can becomestrategic partners for leveraging the valueof data.

Susan Dargan is senior vice presidentat State Street.

FINANCE DUBLIN | SEPTEMBER 2012

Providing a high level of detailedand quality data to clients 49%

44%

33%

32%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

5%

Achieving sufficient scale with in-house systems

Providing accurate data to regulatorsand auditors in a timely fashion

Safeguarding investor data

Don’t know

Source: 2012 State Street Survey of European Asset Managers conducted by theEconomist Intelligence Unit.

WHAT ARE THE GREATEST DATA MANAGEMENT CHALLENGES TO THEASSET MANAGEMENT INDUSTRY TODAY?

Irish fund industry rises to the regulatory challenges facingexchange traded fundsWith a raft of changes affecting exchange traded funds, Irish fund services providers are working to ensure the effectiveimplementation of new guidelines, writes TARA O'REILLY of William Fry. She looks at the impact of the changes and howthe Irish funds industry aims to retain is position as a global leader in ETFs.

Exchange Traded Funds28

Ireland is a leading fund domicile forinternationally distributed ETFs. It ishome to long established global ETF

promoters and also has been more recentlychosen by many of the new entrants to theETF market as the domicile for theirEuropean platform. So what is it thatIreland offers?As a starting point, virtually all ETFs

are UCITS and Ireland has a long standingreputation as a leading European domicilefor internationally distributed UCITS.ETFs have been domiciled in Ireland sincetheir first arrival in Europe in 2000.Ireland therefore offers expert knowledgeand experience in all aspects of ETFs froma well informed regulator to establishedproviders of administration, custody,registrar, legal and audit services. Irelandalso offers an efficient, low cost andtimely listing process through the IrishStock Exchange with the advantage thatonce listed here a very straightforward andexpedited process exists for admission totrading on other exchanges, such as theLondon Stock Exchange. Irish ETFs havealso been registered and cross listed in anumber of jurisdictions outside of Europe.Ireland also boasts a favourable taxposition for funds and has a large networkof double tax treaty agreements in placeand Irish ETFs have long qualified forfavourable withholding rates oninvestments in certain jurisdictions.With the pace of growth and innovation,

ETFs have become a high profile productand have come under the spotlight ofEuropean regulators. When firstestablished, ETFs were regulated underUCITS I. Within that regime of limitedeligible investments and broaddiversification requirements, ETFs wereindex tracker funds directly investing inthe securities of the relevant benchmarkindex (physical ETFs). The indices theseETFs tracked were typically broad basedwith equity or bond components. With theintroduction of UCITS III an increasedeligible asset range was introducedallowing the product to develop bytracking more concentrated indices.Significantly, UCITS III also allowed analternative method of replication throughthe use of derivatives thereby introducingthe synthetic ETF and through synthetic

exposure allowingaccess to assetclasses that couldnot be invested indirectly. As ETFstrategies continueto increase in scope,product developmenthas included ETFstracking more

concentrated/customised indices,additional asset classes and even activestrategies. ETFs are also using moresophisticated financial instruments toachieve replication. There have also beennew entrants to the market with differentmodels for structuring their ETFs. In theface of this, regulators have grownconcerned about the risk of productconfusion for investors. There has beenmuch discussion of counterparty risk,liquidity impacts and possibledestabilising effects on markets, making it

difficult for investors to analyseinvestments. In addition to regulators,institutions such as the Bank forInternational Settlements, theInternational Monetary Fund (IMF), theFinancial Stability Board and theInternational Organization of SecuritiesCommissions (IOSCO) have expressedconcerns, particularly about the systemicrisks they believe are potentially posed bysynthetic ETFs. Much debate followed thereports issued by these bodies and, inparticular, the consultation and reviewprocess of the European Securities andMarkets Authority (ESMA) culminating inthe recent report paper, 'Guidelines onETFs and other UCITS issues' of 25 July

2012 (the 'guidelines').ESMA was examining the impact of

ETF product innovation following theintroduction of UCITS III on investorprotection and market integrity andconsidered a number of structural mattersof ETFs, from an investor transparencyand protection perspective. There havebeen many and varying views on theissues raised coupled with questions as towhy ESMA has chosen to focus on ETFs,given the size of the ETF market and itsalready highly regulated status. While thereview was initially focused on ETFs, theissues raised related to general UCITSprovisions and the guidelines thereforehave a general UCITS impact withconsequences for any index trackingUCITS or UCITS using derivatives orEPM techniques (repos/securitieslending). The guidelines are effective twomonths after their official publication andwhile many of the requirements offer agrandfathering period for existing funds ofup to twelve months, a couple of theprovisions are immediately effective. Theguidelines also apply immediately to newfunds established after the effective date. The guidelines are broad and address all

aspects of the ETF structure. They firstdefine an ETF and provide that only ETFsmeeting that definition can use the term'UCITS ETF' in their name. While thatwill bring clear brand recognition tocontain ETFs, it comes with complianceand disclosure requirements outlined inthe guidelines.A fundamental part of the construct of

an ETF is the index that it tracks\replicatesand the guidelines focus on this. Whileindices are currently the subject ofregulation, regulators looked atdevelopments in index construction and inself-indexing. ETFs were originallydeveloped to track broad based indicesdeveloped by specialist third partyproviders. Now some ETF managers arecreating and calculating their ownbenchmark. While the trend towardsincreasing in-house provision by assetmanagers of their funds' benchmarks isstated to be aimed at reducing costs toinvestors, it can also bring into questionissues of conflicts of interest andgovernance. The current position of

FINANCE DUBLIN | SEPTEMBER 2012

Tara O’Reilly

“ETFs have been domiciled inIreland since their first arrivalin Europe in 2000. Irelandtherefore offers expertknowledge and experience inall aspects of ETFs from a wellinformed regulator toestablished providers ofadministration, custody,registrar, legal and auditservices.”

Exchange Traded Funds 29

regulation on this issue differs betweenthe US and Europe. In the US, the 1940Investment Company Act places tightrestrictions on investment companies'dealings with affiliated parties. In Europe,however, the rules governing acceptableindices focus on the suitability of theunderlying index as an investmentbenchmark, not on preventing transactionswith related parties. UCITS regulationrequires that an index-replicating fundshould use a benchmark that is 'adequate'for the market to which it refers,'sufficiently diversified' and 'transparent'.The guidelines develop the criteria furtherand include a requirement to publish thefull index calculation methodology forsuch indices and to disclose all indexconstituents.ETFs will need to review their index

against the new requirements to ensurecompliance and also review ifarrangements with providers need to beaddressed in light of the new disclosureproposals.

Once the index meets the requirements,the next issue the guidelines address ishow the index is replicated. Much of thedebate in recent times has centred on thediffering risks relating to the manner ofreplication by ETFs. For the syntheticETF the debate has been around perceivedcounterparty risk and for the physical ETFthe debate has been around the perceivedrisks of the ancillary activity of securitieslending. In looking at syntheticreplication, the guidelines look at the useof total return swaps or other financialderivative instruments with similarcharacteristics and impose requirementsin relation to diversification ofunderlyings and ensuring any discretiongranted under the instrument is reflectedin an appointment of the counterparty asan investment manager. For OTCderivatives generally, new collateralarrangements apply includingrequirements on diversification,eligibility, haircuts and stress testing. Forphysical ETFs that engage in securitieslending, the arrangements in relation tosharing of the revenue generated need tobe reviewed with greater transparencybeing required in relation to sucharrangements.With transparency and investor

protection key in the minds of regulators,regulatory focus is also on how ETFs aresold. Unlike the US, investors inEuropean ETFs are mainly institutional.However, it is believed that initiatives inEurope as to how investment advice ispaid for will, over time, result in EuropeanETFs having a greater retail investor base.An example of one such initiative is theRetail Distribution Review (RDR) in theUK aimed at ensuring that investors areoffered a fair and transparent chargingsystem for advice and that investors areclear about the service they receive.Similar proposals are being considered inother jurisdictions to address theperceived loss of confidence of investorsin advisers and to place additionalresponsibilities on advisers in theprovision of their services to keepinvestors fully informed. If these changesdo result in a diversification the ETFinvestor base, it is understandable thatregulators would concern themselvesabout the ability of retail investors tounderstand the differences in producttypes and the investment strategies andrisks in products with increasingcomplexity. The guidelines address this byrequiring significant disclosure in theprospectus around the detail of the ETF.In most cases this disclosure was alreadyrequired by the Irish Central Bank sothere should be little additional disclosureneeded for these ETFs.Investor protection also drives a focus

by regulators on how the products aresold. The selling of ETFs is looked at inthe very ETF specific area of thesecondary market, where many investorsgain exposure to the ETF. The guidelinesseek to offer protections to such investorswhere liquidity on the secondary marketis impacted. A specific risk warning mustnow be inserted into the Prospectus and adirect right of redemption must be offeredto the secondary market investors ifcertain conditions arise.The selling of ETFs has also been

looked at in terms of the obligations onthe 'sellers'. Here there have beensuggestions that the current blanketclassification of ETFs, irrespective ofstrategy or structure, as non-complexunder MiFID should be revisited withsome being reclassified as complex.Generally, this is not favoured as it wouldeffectively be the development of a 'two-tiered' UCITS potentially leading toconfusion as to what UCITS representsand thereby damage the global UCITSbrand. Current MiFID II proposalspresent the opportunity to address suchconcerns without the need for different

classifications within UCITS.While the debate on the appropriateness

of MiFID classification of UCITScontinues, there are other proposals inrelation to MiFID that will impact ETFs.MiFID II aims to achieve transparency,competition, investor protection and toseek to develop available market data interms of its quality, format, cost andconsolidation. Efficient secondary markettrading of ETFs is assisted by transparenttrading information. Some current MiFIDrequirements have resulted in somedata/market fragmentation and with aview to remedying this, MiFID II seeks toimprove the quality and consistency ofdata by requiring that all MiFID regulatedfirms publish their trade reports throughApproved Publication Arrangement. Theintention is to deliver market data that isreliable, timely and available at areasonable cost so as to enable investorsaccess to market data which will allow anefficient comparison of prices and tradesacross market trading venues. WhileMiFID II, continues to exclude collectiveinvestment undertakings from its scope,the proposed MiFID II regulation appliesthe MiFID transparency rules (both preand post trade) to ETF shares. As therecan be a lack of transparency from marketparticipants on the secondary market inrelation to the actual price at which ETFshares are traded, the additional reportingrequired by MiFID II will provide greatertransparency from market participants inrelation to pricing and volumes of trade inETF shares which would allow theaggregate volume traded in ETFsthroughout all of its listings to be seen.This additional reporting is offset by theproposal for consolidating tape reporting.This reporting will give the ability to seethe depth of the market place. Where APsunderstand where the best pricing is, itwill ultimately be an advantage to allinvestors.With significant development in ETF

regulation, there are many operationalmatters that ETF promoters are workingon with a view to being ready for theirimplementation. Irish service providersare actively preparing to ensure theguidelines can be efficientlyimplemented. The Irish industry is alsoactively working to ensure that the impactof any regulatory reviews on ETFs aremanaged effectively and that Ireland as adomicile remains well placed to addressthese and to allow promoters focus oncontinuing growth and development.

Tara O’Reilly is a partner at WilliamFry.

FINANCE DUBLIN | SEPTEMBER 2012

“The Irish industry is alsoactively working to ensurethat the impact of anyregulatory reviews on ETFs aremanaged effectively”

Hedge Funds30 FINANCE DUBLIN | SEPTEMBER 2012

Preparing hedge funds for regulationDECLAN QUILLIGAN outlines the advantage that the services that Citco Fund Services can provide to its hedge fundclients can give when dealing with the demands of regulations such as Dodd Frank, FATCA and AIFMD.

From 2012 to 2014 the hedge fundindustry is entering a new age ofregulation. The Dodd-Frank and

FATCA regulations will vastly increasereporting requirements globally, whileAIFMD has operational implications forEurope’s managers and service providers.Preparing for these changes in a shortspace of time is a huge challenge,especially when regulators have yet toclarify important details.Alternative investment managers, large

and small are collecting data far moresystematically than before in order tocomply with new regulatory reportingrequirements.

As the hedge fund industry’s leadingfund services provider, Citco has animportant role to play, offering advice,reporting and infrastructure that will assistour clients in complying with the changesin regulation. Our leading regulatory andtax specialists are already helping clientsto plan for regulation, and we haveintroduced new services and technology toreduce the burden of regulatory reporting.

Data for reportingThe US Dodd-Frank act is the first

regulatory hurdle for hedge fundmanagers to overcome. Starting in thesecond quarter of 2012, managers in theUS, and many from elsewhere, have hadto register with the SEC. Amongst otherrequirements, managers have aresponsibility to file 1,900 pieces ofportfolio data every quarter, through aForm PF.Citco’s Regulatory Reporting service

team has extensive know-how on many ofthe interpretive issues prevalent. Our teamare already providing a service to helpmanagers meet this demanding reportingrequirement. We currently gather asignificant amount of the data stipulatedthrough our fund administration offering,

and we haveexamined how best tocollect data notalready capturedwithin our systems.In addition, Citcooffers an advancedtechnology solutionwhich includes theCFS Form PF Portalwhich enablesinvestment advisors tocomplete Form PF online for ease ofcollaboration with our RegulatoryReporting service team and to ensureconversion to the .XML format requiredfor submission to FINRA. Coming close behind on the regulatory

horizon is FATCA, which effectivelyrequires offshore funds to enter intoagreements with the IRS to provideinformation on financial accounts helddirectly or indirectly by U.S. persons.Although FATCA withholding tax will notbe enforced until 2014, the FATCAregulations are scheduled to phase in witheffect from January 1, 2013. Accordingly,we have launched a service this year toassist our clients in categorizing theirinvestors’ in accordance with FATCAclassifications.

The Citco Value Added Approachinvolving people, process and technologywill enable our clients to be in a positionto request the required information on atimely basis from their investors in orderto certify that the required due diligencehas been performed as required underFATCA.

Flexibility in EuropeIn Europe, Citco’s experience in

servicing Irish and Luxembourgdomiciled UCITS and non UCITS hasproven invaluable as Citco and theindustry readies itself for change post theAIFMD regime’s introduction in 2013.While the ESMA technical body has still

to publish its final advice containingcritical details that could alter the make-up of the European hedge fund market’soperational infrastructure, we areconfident we will be able to assist hedgefund managers in meeting the challengesthat AIFMD will pose. Citco Bank currently acts as a

depositary for both Irish and Luxembourgdomiciled funds and as such is already ina position to fulfil many of the ESMAdepositary requirements. We have alsobuilt up a sub custody network of primebrokers which will enable clients tocontinue utilising a model similar to whatthey use today. For non EU funds that donot wish to use the ‘marketing passport’the requirement for a single depositarywill not apply and as such Citco will beable to carry out the cash monitoring andsupervisory duties whilst allowing thecustodians and prime brokers continue tofulfil the remaining duty of safekeeping ofassets as they do today. Furthermore,Citco with its capability of pricingcomplex financial instruments is wellpositioned to fulfil the valuationprovisions of the impending regulationmaintaining current best practice ofindependently pricing portfolios.

Declan Quilligan is managing directorof Citco Fund Services (Ireland)Limited.

“Citco Bank currently actsas a depositary for bothIrish and Luxembourgdomiciled funds and assuch is already in aposition to fulfil many ofthe ESMA depositaryrequirements.”

“Citco with itscapability of pricingcomplex financialinstruments is wellpositioned to fulfil thevaluation provisions ofthe impendingregulation maintainingcurrent best practice ofindependently pricingportfolio.”

Declan Quilligan

“The Citco Value AddedApproach involvingpeople, process andtechnology will enableour clients to be in aposition to request therequired information on atimely basis from theirinvestors in order tocertify that the requireddue diligence has beenperformed as requiredunder FATCA.”

Every step of the way

Investment managers face a wide range of challenges and each step

requires the same outstanding professional support and advice.

We’re proud of our team and the audit, tax and advisory services we

provide to investment management businesses around the world.

To find out more about how we can do the same for you, please call

Darina Barrett at +353 1 410 1000.

kpmg.ie

© 2012 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Taxation32

The hedge fundindustry hasexperienced

steady growth sincethe beginning of the1990s when totalassets undermanagementrepresented only $39billion, as comparedwith $1,900 billionat the end of 2010. Over the same period,the number of registered hedge fundsincreased from 610 to 9,237. Tradingstrategies have shifted towards Event-Driven and Relative Value strategies whilethe share of assets managed in GlobalMacro strategies has significantlyreduced. Equity Hedge strategies continueto be the most used in practice. At thesame time, hedge fund business modelshave evolved, driven by institutionalinvestors who seek efficientdiversification as a means to preservecapital in an environment of volatilemarkets and low bond yields.

These changes, however, do notnecessarily mean that growth in the sectorhas been exclusively along sustainablelines. Regulation has in many jurisdictionsbeen relatively light and risk managementissues have only benefited from partialattention, potentially posing significantrisks. The capacity of hedge funds to shortpositions, and to use complex andsometimes illiquid financial instruments,may make their exposure difficult tomanage.

Key risks in the hedge fund industryRisks shared with mutual funds (market

risk, credit risk, liquidity risk) combinewith idiosyncratic risks, among whichmodel risk is the most substantial. Themanagement of hedge funds is oftenbased on technical models which aredesigned to respond to market signals andto continuously re-evaluate positions.

Accordingly, model risk becomes central -and is in a way perhaps best described asthe risk borne by the investor in relation tothe hedge fund managers’ ability to builda reliable model and to develop itappropriately over time. Model riskmitigation requires a structured approachand use of sophisticated risk managementtechniques.

Risk management in practiceWeak risk management has historically

led to startling collapses. To take just oneexample, the failure of hedge fundAmaranth Advisors LLC appears to be atextbook case, and is to date the mostnotorious example of style drift (a changein a hedge fund’s investment strategy). Itscollapse appears to have been associatedwith lack of control, lack of transparency,lack of expertise and excessiveconcentration. A number of key indicators(e.g. VaR, Hurst exponent) seem to havebeen ignored. As a rule of thumb, riskmanagement within the hedge fundindustry should not deviate from the bestpractices used in any other investmentvehicle or investment company. The riskfunction must adapt to each hedge fund’sspecific situation, depending on thestrategy developed. The manager mustcreate a well-tailored risk managementsystem, proportionate to the nature, thesize and the complexity of the hedgefund’s activities and instruments. Risk management responsibilities need

to be clearly allocated within the team aswell as being hierarchically andfunctionally independent from theoperational units. Good risk managementrelies on human resources, keycompetences and well-adapted technicaltools. Risk management policies must beapproved, periodically reviewed andtransparent to investors who can analysetheir relevance. They must also be subjectto appropriate and regular compliance andperformance monitoring.The risk management function’s key

role is to ensure the relevance of the riskprofile set by the management team andto verify the consistency between the risklevels set and the strategies developed. Itsrole also involves validating and

monitoring key risk indicators set by themanagement team and ensuring therelevance of thresholds and risk limits aswell as the efficiency of risk identificationtools.

Roles and responsibilities of riskmanagementBroadly speaking, risk management is

an ongoing relationship between themanagement team and the risk function.Throughout the life of a hedge fund, themanagement team ensures continuousmonitoring and adapts its profile to everychange in market conditions or strategy,while the risk function carries out thenecessary second-tier controls andvalidates those changes which occur.Adequate risk management, combined

with enhanced transparency andregulation, provides assurance of a hedgefund’s continuous and long-term growth.All stakeholders can be involved in theimprovement of risk management withinhedge funds. Investors, as part of theirselection process, have a unique role.Regulators, too, must provide a regulatoryframework conducive to theimplementation of best practice. It shouldbe recognised that the nature of industryparticipants means that over-zealous andrestrictive controls run the risk ofconstricting growth. Nonetheless, theexperience of past crises and the structureof the industry as we perceive it todaysuggest that steps taken to strengthen riskmanagement practices will, in the longterm, support more resilient growth in thesector.

Mark Kennedy is head of financialservices at Mazars.

Risk management functions to supporthedge fund growthThe hedge fund industry shares risk with mutual funds such as market risk, credit risk and liquidity risk, but these risksare combined with idiosyncratic risks, with model risk being the most substantial, writes MARK KENNEDY. Sophisticatedrisk techniques are required to mitigate model risk and hedge fund managers must create a strong risk managementfunction to ensure sustainable and resilient growth, he says.

FINANCE DUBLIN | SEPTEMBER 2012

“The failure of AmaranthAdvisers LLC appears to be atext book case and is to datethe most notorious example ofstyle drift”

“All stakeholders can beinvolved in the improvement ofrisk management within hedgefunds. Investors, as part oftheir selection process, have aunique role. Regulators, too,must provide a regulatoryframework conducive to theimplementation of bestpractice.”

Mark Kennedy

· A leading provider of fund services in Ireland

· More than 2,000 experienced local professionals

· A wide range of funds and structures serviced

· Active in more than 100 markets worldwide

State Street in IrelandState Street is one of the world’s leading providers of financial

services to institutional investors. Since first establishing

our presence in Ireland in 1996, we have become a recognised

administrator and custodian, responsible for servicing more

than $600 billion* of assets under administration in Ireland.

State Street also provides asset management services to

institutional investors. With offices in Dublin, Drogheda,

Kilkenny and Naas, and more than 2,000 local employees,

State Street has the resources and expertise to meet your

complex, global investment needs.

For more information, please visit www.statestreet.com/ie

* As of 30 June 2012

©2012 STATE STREET CORPORATION 12-14325-0812