The scope of the Alternative Investment Fund Managers Directive has been a big grey area since the first draft. This carries with it primary problems for funds, who may not be certain whether they are AIFs or not, but also secondary problems for those selling derivatives to the buy-side. Firms that are uncertain of their counterparties’ status face an unappealing choice between added collateral/capital costs and potentially being non-compliant.
Under EMIR, firms dealing in derivatives have to classify their counterparties according to whether they are financial counterparties (FC – which includes AIFs) or non-financial counterparties (NFC). If firms misclassify their counterparties as AIFs then they will be forced to clear trades unnecessarily and thus tie up more of their assets in collateral. If they go the other way, and misclassify AIFs as NFCs, then they will be non-compliant with EMIR. And to complicate matters further, CRD IV also requires firms to classify their counterparties to derivatives transactions FC/NFC for the purposes of deciding whether or not the firm must calculate CVA and hold extra capital against the trade. Therefore it is doubly in the interest of the firm to classify their counterparties NFC.
In this respect, the FCA’s recent policy statement (PS13/5) brings good news for markets. In brief, the FCA has stated that special purpose vehicles (SPVs) will generally not be AIFs. This is based on the suggestion that they do not invest in securities ‘for the benefit of investors’ and ‘in accordance with a defined investment policy’. The policy statement also attempts to clarify the rules on joint ventures and commercial undertakings but the FCA continues to hedge its bets and refuses to say absolutely whether or not each type of entity is out of scope, deferring to the definition in the Directive.
All of this will bring some clarity to entities determining whether or not they are AIFs and whether they need to take legal advice or put in an application for authorisation. However, it also has implications for sell-side firms’ reference data, which should now treat SPVs differently to, say, hedge funds and PE funds.