Look-through Symposium: an asset manager's view


Dr Nathalie Aubry-Stacey, Director – Market Practice and Regulatory Policy Department, ICMA* As asset managers, we have deep concerns regarding the look-through approach proposed by the regulator. We believe the approach will profoundly affect operations, compliance and relationships between asset managers and insurance companies. This is particularly true for applying look-through requirements to funds of funds. The working group is worried that insurance companies will amend and simplify their asset allocations policies to meet their reporting requirements. This means they could lose out on the benefits of economies of scale or investment returns from some products because of compliance issues. Moreover the look-through requirements will be a cost that will be passed on to insurance companies in the long-run. Indeed asset managers feel that the look-through approach will have consequences for insurance companies’ investment policies in the long-term.

The Challenges for funds of funds

Several insurers investing in a single mutual fund may demand different types of data and data formats, thus increasing costs for the mutual fund holders and going against the rationale of collective investment – that is to spread the cost over a large base of clients in order to profit from economies of scale. The increase in cost could prevent insurance companies investing in mutual funds in the future. For smaller insurers, captives and those in run-off, cost effective investing necessitates the use of mutual funds. Current ‘look-through’ proposals may detract from the cost effectiveness of this opportunity unfairly penalising those smaller insurers. There is also a problem of treating all investors equally. Unlike private funds, mutual funds have more than one investor and all investors within a single mutual fund should have same access to the details of the fund. Hence, if holding details are shared with one investor for regulatory disclosure, this should be shared with all the other investors. From a technical point of view the problems also stem from the fact that under Solvency II, insurers will require earlier reporting than is sometimes currently offered by the asset managers to their investors. If the information is public, there is no conflict of interest. If it is not, disclosure is forbidden because all investors are supposed be treated equally (i.e. to have the full composition of the portfolio available at the same time). The group would like to know if the regulator has given any thought to this conflict and how it proposes fund managers address it. Currently there is no technical or procedural infrastructure to perform or provide any detailed reporting for mutual funds, and this is from an accountancy point of view as well as an interface one. Moreover this is not an easy infrastructure to build – it would be much more complex than that designed for the German Spezialfonds for instance, because it goes beyond a simple ‘one manager – one fund owner’ relationship. Therefore it is expected that building such an infrastructure to comply with the look through requirements will take some time and would be very costly.

Breaching confidential agreements

From a compliance perspective, many fund managers have signed confidentiality agreements with third parties not to disclose information. This is especially true in relation to funds of funds where a number of investment managers are used. Such information is usually confidential in nature as it may reveal the proprietary trading strategies of the fund managers. Any disclosure, therefore, may significantly impact the ability of fund managers to trade in the market and may, in turn, impact the investment returns that insurers will receive.

Difficulty in obtaining data

During the QIS 5 exercise where insurers required a look-through for all their investments (to calculate their SCR), some had difficulty in obtaining the detailed information from some of their asset managers. The risk in such a context is that to overcome this barrier some insurers might decide to simplify their asset allocation and internalise the management of parts of their portfolio to ensure and control the data quality of their investments.

Complex investment environment

Finally the working group believes that the increasing complexity of cross-border security transactions and asset management is a barrier to the look-through approach given the difficulty of determining the location of the positions. Reporting a look-through of the asset portfolio will be very problematic. Indeed having many third parties within the data chain means that to collate this kind of information may take weeks and sometimes months. To do this within the deadlines proposed by EIOPA will be a huge challenge. The reporting on an ISIN level basis for investments, instead of providing data on an aggregate basis would risk dramatically increasing the costs already carried by the asset managers’ clients.

Use of the data

At this stage of the regulatory process it is key for the ICMA working group to have a better understanding of how the regulator would review the end data. It would help asset managers to consider the level of granularity needed to meet regulatory requirements in a proportional manner. The working group believes that it should be possible to define a level of granularity that could be acceptable to both regulators and asset managers in assessing risk concerns, and that this level of granularity does not include delivery of ISIN level data – and take into full consideration the reality which asset managers and insurers face. * Members of ICMA’s pan-European Solvency II Working Group include: Alliance Bernstein, Allianz Global Investors, AXA IM, Blackrock, BNP Paribas IP, Credit Suisse AM, Deutsche Bank AM, FandC, Goldman Sachs AM, ING, JP Morgan AM, PIMCO, Schroders, SSGA. Link to Symposium index page.

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Tagged asset allocation, PIllar III, Reporting