BNYM: AIFMD asset segregation will compromise tri-party collateral management and securities lending

Comment from Ross Whitehill, managing director, BNY Mellon Markets Group.

“There is mounting concern within the industry that enforced segregation of AIF assets – and most likely UCITS, depending on regulatory harmonisation with AIFMD – across all levels of the custody chain, as proposed under a recent ESMA Consultation Paper, will significantly impact the ability of these funds to utilise tri-party collateral management services and participate effectively in securities lending. The impact on funding and liquidity in the market will, we believe, be very significant affecting growth and investment in Europe.

“The intention of the proposed AIFMD asset segregation rules is to protect the interests of the AIF’s investors by ensuring that assets are not exposed to events such as bankruptcy of the third party to whom the safekeeping of the funds’ assets may be delegated. However, taking this to mean that accounts should be segregated down to the sub-custodian level to enhance investor protection, could result in a policy that exacerbates rather than mitigates counterparty, operational and systemic risk.

“The proposed segregation approach actually increases investor risk along the post trade chain. It also increases systemic risk. This is due to the substantial increase in accounts, a corresponding increase in movements of securities, and in particular the inability of AIFs to function in a tri-party environment. There will also be increased settlement and operations risk because market deliveries will be necessary, rather than intraday book entry books and records management.

“This segregation requirement would have a direct impact on pension funds, insurance companies and other non AIF counterparties, as there will be no third party collateral manager to support the related transactions such as repo and securities lending. Collateral management is a highly specialist function and – given the demand for, and likely scarcity of eligible collateral it is highly unlikely that funds will be in a position to effectively support their collateral management requirements themselves. The removal of tri-party collateral management will place an inordinate burden on the funds themselves and their counterparties, forcing them into bilateral collateral management.”

The original article is available here: http://www.automatedtrader.net/news/at/153736/aifmd-asset-segregation-will-compromise-tri_party-collateral–management-and-securities-lending#order

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