23/11/2011 Author: Will Wainewright

One step at a time

The publication of Esma’s AIFMD guidelines last week is the latest small step in the long process of hammering out a final version of the legislation, with all eyes now on adapting the rules to each individual country next year 

Esma, the European agency tasked with issuing implementation advice on the Alternative Investment Fund Managers Directive (AIFMD), did its best to end on a bang when it released its final guidelines last week. At 500 pages, it was long enough to keep lawyers on their toes, but as the industry slowly digested the document’s implications, it became clear that it contained no nasty – or especially pleasant – shocks.

“There were no real surprises in the final guidelines,” says an industry lobbyist who tracked the process first-hand. “We already knew they were going to drop the craziest aspects of the depository requirements, but the final guidance is by no means perfect.” One disappointment related to the leverage provisions. “The industry will have to calculate leverage in a different way to other sectors, using two different calculations, which will be an operational nightmare for smaller firms.”

There was some progress, however. “I am encouraged that Esma’s final advice to the Commission seems to have evolved in respect of third-countries to a position of less rigidity than was apparent in its initial draft advice,” says Robert Duggan, partner at Cayman law firm Mourant Ozannes. Jonathan Herbst, a corporate lawyer with Norton Rose, says the definition of how losses are defined has been tightened up in the depositories section. “There has also been progress in terms of equivalence tests and Ucits comparisons,” says Herbst.

In some areas, like remuneration, very little has been altered from the previous guidelines issued by Esma in July and August. Tim Wright, director and remuneration specialist at PwC, says the interesting developments will come during Phase Three next year, when national regulators have to tailor the Directive to local regimes. “To take the UK example alone, there are questions over how the Directive will work alongside CRD III which need to be clarified. “The thing is, this process of individual tailoring will play out in 26 other countries too.” Guidance on remuneration is expected from the FSA, the UK regulator, in early 2012.

What happens next year will prove all-important. It is worth remembering that Esma is issuing advice, no more, and there is no onus on the European Commission to stick rigidly to the guidance. There are mixed views on whether they will or not. “My strong suspicion is that the European Commission will stick with it apart from a couple of politically charged issues,” says Herbst. “I wonder if they have enough resources in place as much as anything else.”

As with Cesr, its predecessor, Esma is a well-respected body and there is general agreement that the Paris-based agency has done an impressive job in a small space of time. But Cesr tended to work on technical aspects of existing legislation, with fewer political overtones. As Martin Cornish, partner at law firm K&L Gates, points out: “Esma is advising on an entirely new structure in a process that is more political than the sort Cesr would usually have been engaged in.” Indeed, some think Esma’s independence is compromised by the European Commission’s influence, particularly on the depositories issue. One lobbyist tells HFMWeek that Esma is nothing but a “de facto Commission agency”.

Another criticism of the process is the limited time afforded to Esma to execute such a gargantuan task. But most admit the agency has listened to the industry and been largely flexible on several issues. The final proof will only come, however, when the European Commission issues its guidance next year, which must be stuck to more rigidly. Whichever way it goes, one thing is clear: the European regulatory process, rarely the quickest, will trundle on for some time.