Investment banks and hedge fund groups are now in opposition about new securitisation rules that were created to make financial markets more stable while increasing levels of protection for institutional investors. The Alternative Investment Fund Managers directive started this past July in Europe as a new structure for hedge funds. It makes hedge fund managers look more closely at the securitisations they’re exposed to.
One of the biggest concerns companies looking for funding highlight is , according to the directive from the AIFM, they will have to make sure that investment banks hold on to a 5 per cent stake in their issued securitisations. It might span all kinds of securitisations from commercial mortgage-backed loans to credit card loans to car loans to asset backed paper.
A representative from the buyside end who attended the meeting and who did not want her personal information leaked stated that the risk retention requirement was an unpleasant. She said it made things more difficult for alternative investment fund managers that were already invested in the involved securities. The risk retention requirement, of course, is designed to put more pressure on banks to carry a certain amount of risk in transactions. She also said that fund managers were now trying to figure out how they would obtain the necessary information from issuers. There was, in addition, a new and more practical issue regarding whether the banks did or did not have the necessary information that they were required to disclose per the directive.
The buyside participant said that there were certain banks who had already informed hedge fund managers that they would not be able to receive the kind of information they were requesting due to its being inaccessible or confidential in nature. The requirements described above will soon be given to the mainstream fund industry in Europe in the next two years, as by 2015, the European Commission will be required to have the same rules of securitisation present for Ucits funds.
What makes issues even more complicated from the perspective of the typical fund manager is the news that securitisation’s definition is not the same as it used to be. In fact, the definition has grown wider through the AIM directive so that at this point it means any kind of loan that will be divided into tranches. What this means is that a number of hedge funds that have fixed income exposure and were formerly compliant with the AIFM may soon start running out of the bounds of European regulators unless they can begin to correctly point out the securitisations to which they are exposed. They could also put themselves at risk of not being compliant if they cannot keep track of whether or not a bank still has its stake present. Christian Donagh, a law firm partner, noted that the fund industry would likely find these requirements to become much bigger issues in the near future. Who will win this battle?