“Data is the new oil !” is the rally call for today’s digital revolution. And, as data purveys all aspects of our lives on the world’s determined path to total digitalization, there is also the call for greater transparency.

Indeed, the financial industry is not exempt from this “data revolution” topic and its associated euphory. With the approaching launch of the ESMA central fund database as one of the sector’s new regulatory requirements, we would like to dig-in to the data opportunities that have been buzzing for the past two decades in the specific context of the cross-border distribution of investment funds.

The cross-border distribution of investment funds implies intense and increased data exchanges between the different players of the investment fund sector, including corresponding regulators. Lines between data exchange and reporting are blurring and it is becoming extremely hard to differentiate one from the other.

Luxembourg and Ireland are the world leaders in terms of cross-border investment fund distribution. Their funds are popular on a worldwide basis and are subject to the ever rising demand for data and reports from regulators across the globe, creating ongoing challenges from on the distribution process.

This article zooms-in on the applicable regulatory requirements related to data and their availability that are already, or will soon be, in place. We discuss the challenges and opportunities related to data and reporting so that the question whether data will—or will not—facilitate the cross-border distribution of investment funds, can be addressed.

Evolution of regulatory reporting requirements constantly demanding for more and more reports/data

Everyone involved in fund manufacturing has witnessed the expansion of regulatory requirements over the last two decades. Reporting factories used to simply prepare funds’ annual and semi-annual reports, complemented with some regular accounting reporting.

However, in 2001, the UCITS III¹ Directive set the basis of fund risk management. The introduction of the long form report in Luxembourg added to the strengthening of fund substance and governance and increased transparency with the regulator. This provided the CSSF with more robust tools to allow supervision. As an illustrative example, in addition to the rising of a dedicated risk management function, Luxembourg funds initiated the disclosure of retrocessions and portfolio turnover ratio.

In 2002, the CSSF Circular 2002/77 on Protection of Investors² went a step further demanding not only notification to the CSSF of material NAV³ errors or breaches in the investments restrictions and policy, but additionally imposing reimbursement to shareholders impacted. This information is made public through the annual CSSF report in a summary of NAV errors and investment breach notifications received during the year, as well as their impact.

Since then, an extensive range of supplemental reports have come out - so many in fact, that we could not begin to list them all!

In response and to support international harmonization and use of recent templates, the market has decided to unite their strengths. In 2019, FinDatEx⁴ was created and is already maintaining key templates used within the sector across the board.

EPT⁵ and EMT⁶ are just two of these key templates which have been implemented more recently and are of particular interest as they are not directly communicated to the authorities but, instead, to the distributors, acting as an intermediary with the investors. Distributors may decide to blacklist the manufacturers who do not follow the rules.

One of the most recent templates from FinDaTex, not yet commonly used, is the EFT⁷. In this instance,  distributors (or investors) provide their feedback to the manufacturer in terms of transactions and potential deviation on target market objective.

Lately, another template, the EET⁸ is currently under discussion.

Figure 1: shows the current data and report flows among the actors of the investment fund industry that are required for cross-border distribution:

Click here to enlarge the picture

The regulatory reporting activity is far from slowing—on the contrary, its seems to in fact be accelerating, but perhaps in more beneficial manner to many. In light of the latest regulatory developments, we can observe the emergence of stronger awareness around sustainability and ESG-related elements. The inclusion of ESG commitment in the investment strategy of investment funds is one of the strongest selling arguments, even more so in the cross-border context. Indeed, the number of socially responsible investment funds are expected to expand.

With the CBD-EU Directive⁹, the EU Commission has lately imposed additional publication requirements to the national regulators when it comes to the cross-border distribution of funds. These are not only the publication of fees and charges levied by the national competent authorities, these are investment funds-related data at share class level that the national regulators will communicate to ESMA¹⁰ on a quarterly basis. This data will be used for the creation and maintenance of a central database on the cross-border marketing of AIFs and UCITS and will be available on ESMA’s webpage as of 2 February 2022. The aggregation of this data may be seen as a big ‘fund registration matrix’ as it will publicly expose fund data to an even greater degree than is available today. This development will offer many opportunities to those who consume such data—but piles on far more pressure for those producing it.

The regulatory developments of the last 20 years formulate an increasing demand for data exchange and reports. Historically, the data and reports in the context of the cross-border distribution were provided by the IFMs to the national regulators who kept or exchanged the data among each other for statistical and supervisory purposes as well as to safeguard the best interest of the investor.

In the next few months and for the first time in the regulatory evolution, data collected by the national regulators will become publicly accessible to all interested parties via the ESMA’s database. 

Impacts on the playing field of the investment fund industry 

In principle, all these developments should ensure alignment between the different templates or sources, be it prospectus, EPT, EMT, or other documents translated into different languages.

Indeed, a UCITS KIID in German shall have the same content as its original in English. However, a same document in German for Germany may present small differences with its counterpart in Switzerland. There may also be some specificities within the French UCITS KIID for Belgium and France etc..

Such documents require updates, yet this may result in desynchronization between calculated/current and published figures. The documents may not be updated every time the data is changed, but instead once a trigger is activated.

For example, as a generic rule a UCIITS KIID update is triggered after a constant change of value of the SRRI for more than a 16 week sliding window. In Figure 2, the calculated SRRI has changed, but it will only be updated in the UCITS KIID on week 17.

Figure 2: SRRI update

Depending on processes, investment fund managers (IFMs) could even observe a de-synchronization between reports. For example, the UCITS KIID would show published values whereas EPT or EMT would include calculated ones. All these discrepancies are likely to apply to any data such as SRRI or costs and charges.

In addition, we have until now mostly focused on legal or regulatory documents, but the challenges and complexity also apply for marketing documentation that should, for instance, also satisfy the requirements to be fully aligned with the legal documents. The consistency of information also applies to factsheets. Although, are factsheets or any marketing documents in each language really aligned to legal documents, such as prospectus?

Multiplicity of data to be fed via different channels and templates as well as complexity of reporting processes, requires strong IT and operational infrastructure. However, IFMs in charge of the supervision of their funds’ activities, do not always have the necessary technical infrastructure to ensure smooth production of all reports. Either they must invest in data management tools and processes or monopolize resources who will manually and sometimes painfully prepare the reports. Alternatively, they could also opt for outsourcing of their data management and/or reporting process.

This becomes even more complex for IFMs when they must supervise funds allocated to multiple fund administrators, with multiple systems and reports. The first step of gathering and consolidating the data already represents a nightmare.

However, amidst all of this, it is important to highlight that data flows are not one-way. Information must be sent to the authorities or to the distributors, but IFMs may also receive information back. The need for strong data management and automation is paramount.

With the creation of the ESMA central data hub, data related to cross-border investment funds will be publicly available. This is quite a premiere. So far, it has been cumbersome to get structured and reliable data on the market because the national competent authorities were collecting data without sharing them with the public. Now, this ESMA data database represents an opportunity to retrieve data and use it optimally. Strategic decisions could be supported by benchmarking, or any other analysis based on the available data. 

¹ Undertakings for Collective Investments in Transferable Securities (“UCITS”) III Directive

² CSSF Circular 2002/77 on Protection of Investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment

³ Net Asset Value

⁴ Extract from FinDatEx: “…a joint structure established by representatives of the European financial services sector with the view to coordinate, organize and carry out standardization work to facilitate the exchange of data between stakeholders in application of European Financial markets legislation, such as MiFID II, PRIIPs and Solvency 2. FinDatEx’s mission is to support the development and use of standardized technical templates to facilitate the exchange of data between stakeholders in the application of European Financial market legislation.”

⁵ European PRIIPS Template

⁶ European MIFID Template

⁷ European Feedback Template

⁸ European ESG Template

⁹ Cross-Border Distribution Directive 2019/1160 (CBD-EU Directive) amends the UCITS and AIFMD Directives and aims to harmonize the cross-border distribution of funds within the EU. The CBD-EU Directive was enforced from the 2 August 2021

¹⁰ European Securities and Markets Authority