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Mike Hughes, Deutsche Bank

Integrated and menu-driven model to support AIFMs of all sizes

For the most part a lot of the drama surrounding the role of depositories and prime brokers under AIFMD has subsided. All parties concerned have pretty much fallen into line and are clear with what everyone’s roles and responsibilities will be. This is certainly true of Deutsche Bank who are fully AIFMD-compliant and already actively engaged in signing depository agreements with clients.

“We have a model that looks at sole depository services and how that might look in terms of level of reporting, level of due diligence required. We’ve already taken on board mandates where we act solely as the depository,” confirms Mike Hughes (pictured), Global Head of Fund Services at Deutsche Bank.
With respect to AIFMs who are running onshore hedge funds (e.g. an Irish QIF) and whom require an onshore depository under the directive, there are various models being offered by service providers. One is the above scenario described by Hughes where the manager maintains their multiple prime brokerage relationships – and potentially even their fund administrator – and appoints Deutsche Bank to purely perform the oversight function, for which the bank will face strict liability in the event of fund asset misappropriation.
At the other end of the spectrum is a fully integrated approach where Deutsche Bank acts as depository, fund administrator and prime broker to the AIF: a single counterparty relationship which minimises frictional cost to the AIF as risk is contained within the same four walls.
“This depository bundle model can include, in our case, the entire value chain of products and services that an asset manager needs from the point of execution of a trade through to middle-office services and investor reporting, with depository and administration services on top.
“Deutsche Bank is using these different models and trying to be as flexible as we can. We as a firm have to now take on a lot more liability under AIFMD and we need to work through that, understand that liability, the risk profile of the fund and the different risk premia that go against that new level of liability.
Whether Deutsche Bank merely acts as a sole depository providing the oversight function, provides all three core functions under AIFMD to the manager (these include: cash management and reconciliation, safekeeping of assets and general oversight), or the client opts for a ‘menu-driven’ arrangement somewhere between the two, will determine the level of risk exposure to the depository, and ultimately the cost to the fund.
Hughes confirms that this needs to be done on a fund-by-fund basis.
“The most important thing for a depository to consider is the counterparties attached to the investment strategy. Where external non-Deutsche Bank prime brokerage transactions are being used (under the multi-prime model) we need to determine: who is the counterparty? Which legal entity is involved? What markets are they trading? What is the omnibus structure in the underlying market? What is the legal position of the fund’s assets and how are they held in the local market?
“Each of the depository banks – and we’ve gone through an exhaustive list of check points around each local market – has become comfortable with the way assets are held in local markets.
“So when determining risk it is done by fund, by strategy and ultimately by understanding who are the counterparties to the fund,” explains Hughes.
The integrated model that Deutsche Bank has developed to support AIFMs is preferential to the firm precisely because it mitigates risk and obviously provides cost benefits to its clients as compared to a de-coupled model.
Indeed, a white paper written by Deutsche Bank entitled ‘Charting a smooth course through AIFMD implementation’ towards the end of last year clearly stated: “We believe that AIF managers would be best served by consolidating their business with depositories equipped to work with their existing prime brokers and that can also act as fund administrators, cash managers, transfer agents, and sub-custodians within a framework of appropriate “Chinese walls” and segregation of duties.”
Hughes confirms that the model that has been well received by fund managers and notes that for new managers in particular who are launching alternative investment funds, being able to choose an integrated AIFMD model becomes a very attractive proposition.
“Our model is very much the integrated approach where we can provide all the services a manager might need under AIFMD,” says Hughes, who continues:
“However, for larger managers with well developed infrastructures in place, the menu-driven model that we have where they can pick and choose services also works very well. Our principal objective is not to bring any significant change to the market. In that scenario, it’s not feasible for such managers to move lock, stock and barrel to a single counterparty. We completely understand that.”
Being a universal bank, Deutsche Bank has all the functions in place, separated by necessary Chinese walls, to give the AIFM as much or as little support as necessary. One manager might use their fund administration services, one might use them purely for prime brokerage services, whilst another manager might use both in conjunction with depository services to benefit from more of a holistic AIFMD solution.
Ultimately, it will depend on the nature of the manager, but certainly for start-ups, the integrated solution is a compelling one.
Hughes is quick to reassure managers that should they wish to continue to use multi-prime relationships, this won’t adversely affect the way they run their fund. There have been fears that under such a scenario the depository would interfere in the process but a lot of work has been done in terms of agreeing the operational model. This should allow managers to run their fund as per usual.
“We are talking to all the major prime brokers on the street and signing agreements. If a manager comes to us and says, ‘We’d like to appoint you as our depository and we’ve got these four prime brokers’, there should be no drama because we should hopefully already have an agreed operating model in place with each of those primes. If a depository cannot demonstrate that they have these agreements in place with a manager’s preferred prime broker(s) that should be more of a concern than any perceived influence the depository will have,” says Hughes, confirming that Deutsche Bank has made huge strides in signing prime brokerage agreements over the last three months.
As the July deadline fast approaches for London-based managers to become AIFMD-compliant the level of eagerness to have their approved depository contracts in place is building. The level of pressure being applied to service providers to get their ducks in a row has been significant over the last few months. Far from sitting back, managers are actively engaging in the process and pushing everyone to get service agreements in place says Hughes. That Deutsche Bank is able to reassure AIFMs that it can support their AIFMD compliance needs is of strategic importance at a time when some depositories are giving unclear answers.
“We are now starting to see uptake across the board on terms of the type and size of alternative investment fund managers,” confirms Hughes.
“In particular, we are seeing a trend among real estate fund managers. They are being very active in looking for depository solutions.” 

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