AIFMD depositary pricing and capital


AIFMD depositary pricing and capital

Taking a risk intelligent approach

This report seeks to address fundamental considerations on depositary operations, pricing and capital by offering a methodology for evaluating depositary capital requirements and for determining a risk-based pricing strategy post AIFMD.

Executive summary

The Alternative Investment Fund Managers Directive (AIFMD) has fundamentally changed the European regulatory environment. Depositaries are now subject to far more detailed and prescriptive rules, which are driving changes to operational risk assessment, pricing structures, capital requirements and the depositary’s interaction with other industry participants.

Here are some of the key points from the survey results:

  • Depositaries need to reassess their risk profile post-AIFMD and respond by either accepting, mitigating, transferring or avoiding these risks, dependent on the risk parameters set by senior management. A major part of the risk response will need to focus on the control environment, capital and pricing.
  • Depositaries need to adopt risk-adjusted pricing, based on individualised scoring in relation to a range of predetermined risk factors weighted in alignment with the organisation’s risk appetite.
  • These key risk pricing factors include contractual agreements, automated reporting, network overlap and number of prime brokers.
  • Our analysis, based on an interpretation of the Basel framework and Deloitte Risk Intelligence™, indicates that the impact of capital on depositary pricing is expected to be limited in the vast majority of cases and this is borne out in the survey results.
  • However, the impact of increased capital to the depositary’s cost-base could be material for depositaries with weaker control frameworks or with limited integration of sub-custody networks.
  • Depositaries have opted for ‘business as usual’ models with prime brokers combined with enhanced operational oversight to mitigate risk and contractual arrangements to transfer risk.
  • While some depositaries are clearly concerned over the effectiveness of contractual arrangements and would like to see network integration with the prime brokers over the longer term, many are satisfied that the contractual arrangements will provide the long term solution.
  • Ongoing operational costs will likely be reflected in the depositary pricing model to some extent, depending on the level of automation achieved and the increase in overheads, such as staffing costs.
  • Depositaries will absorb one-off investment costs arising from AIFMD.
  • Depositaries have taken different approaches to implementing the cash flow monitoring requirements. The extent to which the depositary can rely on information compiled by other parties and the definition of what constitutes an independent ‘reconciliation’ is one of the key matters of interpretation. A market standard may yet evolve but in the meantime depositaries may face challenges in addressing cash monitoring arrangements with nonaffiliated administrators.
  • Depositaries may only be willing to work with fund administrators within their group or may need to price more risk sensitively for conducting duties such as cash monitoring or ‘depositary lite’ with other non-affiliated entities.
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