Jack Inglis

“[The] vague and overbroad rule exceeds US SEC’s statutory authority, is arbitrary and capricious, and has severe consequences for financial markets,” said the National Association of Private Fund Managers (NAPFM), Managed Funds Association (MFA), and Alternative Investment Management Association (AIMA), jointly.

The two adopted rules require certain hedge funds, among other market participants, to register if they meet one of two qualitative standards, with the final rule set to inflict more scrutiny and compliance burdens on market players.

NAPFM, MFA, and AIMA are aiming to have the rule be vacated in its entirety due to three key reasons: that the SEC lacks the statutory authority to adopt the new definition; that the decision-making is “arbitrary and capricious”; that the rule is “contrary to law” due to its imposing a burden on competition which is outside the scope of the SEC’s purposes.

NAPFM asserted that the redefinition could ultimately lead to a decrease in liquidity: “The US SEC’s redefinition of ‘dealer’ upsets a century’s worth of understanding about the meaning of that term under the Exchange Act […] the agency here tries to extend its reach over private funds in ways Congress never imagined. The Dealer Rule – purportedly designed to increase liquidity in trading markets – could ultimately have the effect of decreasing such liquidity.”

Under the final rules, an entity would qualify as a dealer or government securities dealer if they regularly express trading interest as close to the best price on both sides of the market for the same security, or earn revenue primarily from capturing bid-ask spreads or from capturing incentives offered by trading venues.

If applicable, the new rule requires the market participants in question to register with the commission, become members of a self-regulatory organisation (SRO), and comply with federal securities laws and regulatory obligations.

Jack Inglis, AIMA CEO, said: “The US SEC has exceeded its statutory authority by incorrectly concluding that customers of dealers may be dealers themselves – a clear departure from the statutory definition and understanding of what has meant to be a securities ‘dealer’ for the past 90 years.

“This rule will force certain hedge funds – who are not dealers and have never been considered dealers – to either register as dealers, thereby subjecting them to an unworkable regulatory framework, or force them to significantly curtail or cease altogether their trading activity.” 

He added that both of these results are set to result in unnecessary and significant harm to markets, investors, and certain funds.

The SEC has also confirmed that the final rules exclude: any person that has (or controls) assets that total less than $50 million, investment companies registered under the Investment Company Act of 1940, central banks, sovereign entities, and international financial institutions (as defined in the final rules).

Read more: SEC tags hedge funds trading Treasuries as ‘dealers’ under new rule change

Bryan Corbett, president and chief executive of MFA, added: “We were left with no choice but to challenge the Dealer Rule, because it will harm markets and create tremendous uncertainty for investors.

“[…] Alternative asset managers are not dealers. They are customers of dealers. If the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs. This would harm funds, their investors, and issuers looking to raise capital.”

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Announced in December, the proposal by the European Commission would require all market participants to hold active accounts at EU central counterparties (CCPs) for clearing a portion of certain systemic derivatives contracts.

Read more: Post-Brexit derivatives clearing tussle continues as European Commission clamps down on non-EU CCPs

The new clearing threshold calculation has been designed to increase the attractiveness of EU CPPs, according to the European Commission, with the EMIR 3.0 proposals currently being debated by co-legislators in the European Parliament and Council.

In the joint statement, European trade associations including AIMA, EFAMA, BFPI Ireland, EACB, FIA EPTA, Federation of the Dutch Pension Funds, Finance Denmark, Nordic Securities Association, ICI Global, FIA and ISDA, have urged EU policymakers to delete the proposal and instead focus on streamlining the supervisory framework for EU CCPs across member states.

The trade associations noted that incentivising measures would offer sustainable growth of EU CCPs while maintaining competitive and open markets.

Read more: European clamp down on non-EU CCPs using mandated active accounts could counter competition, EFAMA finds

The negative impacts the proposed active account requirement would have on EU capital markets were highlighted in the statement, including introducing fragmentation, loss of netting benefits and reducing the resiliency of the EU to market stresses with no benefit to EU financial stability. The associations emphasised that the proposal will ultimately harm European pension savers and investors.

Elsewhere, the associations highlighted that the new requirement would create a competitive disadvantage for EU firms when compared to third-country firms, which would still be able to transact in global markets without restrictions.

To comply with an active account threshold, EU clients required to clear at an EU CCP would be forced to accept an uncompetitive price in instances where the price available at an EU CCP is higher than that available at a Tier 2 CCP.

“When making important decisions, such as imposing an active account requirement, policymakers should act prudently and be guided by comprehensive and robust cost-benefit assessments that include a review of the risks and impacts on financial stability and on the competitiveness of EU market participants,” the trade associations said in a statement.

“To date, such a comprehensive and robust cost-benefit assessment has not been produced.”

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Among the various aims of the new proposals, the EC sought to encourage clearing in the EU by simplifying the procedures for central counterparties (CCPs) when launching new products and changing risk models by introducing a non-objection approval for certain changes that do not increase the risks for the CCP. 

The EC also looked to make EU CCPs more resilient by further enhancing the existing supervisory framework through the new proposals, alongside efforts to strengthen EU open strategic autonomy and safeguard financial stability.

 The International Swaps and Derivatives Association (ISDA), the Alternative Investment Management Association (AIMA), the European Fund and Asset Management Association (EFAMA) and the Futures Industry Association (FIA) have responded to the EC’s proposed EMIR amendments with the following:

“Such measures would further reinforce the positive trends already observed in the clearing of euro-denominated contracts at EU CCPs. A strategy based on organic growth and market-driven solutions would best support the competitiveness of EU CCPs in a global clearing marketplace.”

However, the associations were less complementary about the EC’s proposals which would require firms subject to the EU clearing to have an active account at an EU CCP, alongside enabling the European Securities and Markets Authority (ESMA) to define the portion of certain euro and Polish zloty-denominated contracts that should be cleared through those accounts through secondary regulation.

“Changes to capital rules would reinforce this, making it less commercially viable for EU market participants to clear through CCPs based outside the EU,” highlighted the associations.

“We remain convinced that these measures, as proposed, would be harmful to EU capital markets. They would make EU firms less competitive and would have a negative impact on the derivatives market, EU clearing members and their clients, EU investors and savers, and the Capital Markets Union. For EU firms, this would not only hinder their ability to provide best execution to clients, but would also be costly to implement.

“We believe the EC should substantiate the risk of clearing through tier-two CCPs based outside the EU and provide a robust cost-benefit analysis of the proposed active account requirements.”

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In the build-up to the Brexit deadline, Brussels granted UK CCPs an 18-month temporary equivalence to EU regulation in September last year, due to expire next June, with the intention of allowing participants to reduce their exposure to them.

However, the Association of Financial Markets Europe (AFME), the Alternative Investment Management Association (AIMA), the European Association of Public Banks (EAPB), the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA), Futures Industry Association (FIA), the Investment Company Institute (ICI), the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA AMG) have requested this be extended.

In their letter, the associations suggest that the expiration of this equivalence decision next year would pose risks to the market relating to the simultaneous close-out of positions at UK CCPs, market fragmentation and lack of liquidity at EU CCPs, and increased costs.

They also highlighted that the expiration of the equivalence could minimise the oversight the European markets authority, ESMA, has over the market.

“There are a number of factors that limit their ability to prepare for the expiry of the current time-limited equivalence decision for UK CCPs at the end of June 2022, including the fact that the range and depth of clearing services offered by the UK CCPs is still not replicated in the EU5,” said the associations in their letter.

Their letter also highlighted that in line with the EU’s intention to move more liquidity onto EU CCPs, this was a process that should and is taking place naturally.

According to data from LSEG’s clearinghouse LCH and European CCP Eurex, Eurex has seen its market share for euro denominated interest rate swaps increase by 0.5% per month, while LCH’s share has decreased by a similar amount.

“There is already clear evidence of liquidity flowing towards EU CCPs, and our expectation is that this will continue,” the letter added. “We would welcome an extension to the current time-limited equivalence decision to allow this natural, market-led shift to continue and also to allow EU CCPs to continue to develop their offering.”

Clearing has been one of the key battlelines drawn between the UK and the EU following Brexit. Speaking to the Treasury Committee in February earlier this year the governor of the Bank of England, Andrew Bailey, warned that tensions between the two nations would rise quickly if the EU tried to push euro-derivatives clearing out of the UK.

At the end of the 18-month equivalence next year, 25% of euro-derivatives clearing would move to the bloc, however, Bailey has suggested this is not a viable chunk and that the EU could potentially try to “force or cajole” the remaining 75% out of the UK.

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Just under half of traditional hedge fund managers are investing or considering investing in cryptocurrencies, a report by the Alternative Investment Management Association (AIMA) has found.

The research, conducted in partnership with PWC and Elwood Asset Management, surveyed 39 hedge funds in the first quarter this year with a total of $180 billion in assets under management.

It found that 47% of traditional hedge funds have entered or plan to enter the crypto market, with 21% currently investing in digital assets and 26% in the late-stage planning of investing. Of the hedge funds already invested, 86% also intend to deploy more capital into the asset class by the end of this year.

The report also found that the total assets under management for crypto based hedge funds had almost doubled from $2 billion in 2019 to nearly $3.8 billion in 2020.

The barriers to investments cited by hedge funds as reasons for not involving themselves in the asset class included regulatory uncertainty, lack of infrastructure, and client risk/reputational risk. 

“We expect inflows into crypto hedge funds to continue to increase over the coming months as more and more institutional investors decide to allocate to this fast growing space,” said Henri Arslanian, crypto leader at PWC.

“For many institutional investors, an allocation to a crypto hedge fund is the natural first step of their crypto journey as it allows them to observe and learn about the asset class via a vehicle and structure they are familiar and comfortable with.”

Several sell-side participants have launched cryptocurrency focused offerings in recent weeks as the buy-side’s appetite for digital asset investments continues to increase.

Most recent was Cowen which partnered with digital asset blockchain technology provider PolySign earlier this month as it looks to provide institutional clients access to cryptocurrencies. 

US investment bank Goldman Sachs also participated in a $15 million funding round for a crypto market data and blockchain technology provider in May. 

“From the findings in this report it’s evident that hedge fund allocations to digital assets continue to gain traction. Diversification and exposure to a new value creation ecosystem are cited as key drivers for investing in digital assets,” said Jack Inglis, chief executive officer of AIMA. 

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The report, from the Alternative Investment Management Association (AIMA) and law firm Simmons & Simmons, outlined that short selling is key for responsible investing as campaigns are often triggered based on ESG concerns.

Hedge fund strategies can also provide greater insights into how long and short portfolios are exposed to certain risks like climate change and carbon exposure. The report added that short selling is crucial in allowing investors to hedge against ESG risks.

“Alternative investment managers have always been at the forefront of investment innovation. Today, they are using one of their defining abilities – short selling – to protect their investors from novel risks, and to make markets as a whole safer,” said AIMA CEO, Jack Inglis. “We are happy to see this fact gain increasing recognition from investors and leading organisations such as the PRI, and we have no doubt that short selling will soon be seen not just as valuable for responsible investment, but essential.”

The recent report from hedge fund association AIMA follows a widespread ban on short selling across Europe at the height of the market volatility amid the coronavirus pandemic. Not long after the bans were implemented, multiple trade groups and associations, including AIMA, urged the restrictions be lifted as they had failed to curb the volatility, harmed liquidity and price formation, and increased trading costs. The short selling bans were eventually lifted in mid-May.

Short selling, considered a risky but lucrative trading strategy mostly applied by hedge funds, is a bet that the price of a stock will fall. Short sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them to the lender, pocketing the margin.

“Banning short-selling interferes with price formation, thereby increasing uncertainty. That can only artificially amplify volatility and probability of default, the opposite effect to that claimed and hampers the ability of markets to serve the real economy,” said Nandini Sukumar, CEO of World Federation of Exchanges in a statement at the time of the ban. “It is not – and never has been – true that bans have any other, positive effect on market activity or price levels.”

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Responses to the MiFID II review consultation revealed that the buy-side is not in favour of the proposed modifications, which include the removal of the SIs as an execution venue for the share trading obligation and the option to eliminate the double volume caps (DVCs) for dark trading.

Many asset management respondents took the opportunity in their replies to the consultation to question the logic behind the DVCs, which have been a controversial issue since before they were implemented and subsequently.

“It is important to ask more fundamental questions about the effectiveness of the DVC before making incremental changes to the regime,” BlackRock said in its recently published response. “We believe that a more focused SI regime, a consolidated tape, and an EBBO are more effective tools to strengthen transparency and price discovery.

“Concerns that ‘dark’ venues detract from transparency and price formation would be best addressed by having a real-time tape of record that consolidates the information from all venues operating in the marketplace – ‘dark’ or otherwise. The same is true for pre-trade transparency, which is best addressed by developing an EBBO (European Best Bid and Offer).”

The DVCs were introduced in March 2018, following an initial delay to implementation, and have heavily affected trading volumes in dark pools in Europe. They trigger bans on dark trading when a transaction accounts for 4% of the total activity on a single dark venue, or 8% of total trading EU market-wide. 

Dark trading has steadily increased since the first set of DVCs expired in September 2018, despite early and dramatic declines following the introduction of MiFID II. The European Securities and Markets Authority (ESMA) stated in its MiFID II review consultation that the DVCs have had positive, but limited effects on market liquidity since they were implemented, and these benefits need to be balanced against the complexity of the DVC system.

Upon acknowledging that MiFID II had failed in its overarching objective to increase transparency, ESMA put forward various proposed modifications to the DVCs in its MiFID II review consultation, published in February, including extending the scope of the system, adjusting waivers or removing the DVCs completely in favour of another method to restrict dark trading.

Market participants have generally criticised the move by regulators in Europe to curb dark trading, which allows for minimal market impact and in some cases can provide the best price for clients. Some have argued the volume caps are arbitrary and not based on concrete analysis, while others have previously described them as a political compromise.

“One would ask for evidence of the ‘success’ of the DVC’s before we consider extending it,” said Janus Henderson’s response, penned by head of EMEA equity trading, Richard Worrell. “What was the rationale for the 4% and 8% levels selected originally and what evidence do we have that extending them would help investors? Have we seen greater depth to order books since the DVC’s were introduced for example? The basis of much of this paper is that the DVC’s haven’t succeeded in what ESMA seemingly wanted, so continuing to use them let alone extending them without evidence seems slightly mystifying

“We’re not convinced limiting dark trading is the right answer. Venues which offer price improvement, particular midpoint, should be encouraged as they help save investors’ money. When we assess the market, we would note lit venues, particularly the national primary exchanges, do still have the largest market share in each country so there is no cause for alarm.”

Hedge funds, it seems, agree with asset managers in the view that regulatory attempts to restrict dark trading are largely misplaced. The Alternative Investment Management Association (AIMA) rejected any radical changes to the DVCs, highlighting that huge volumes are executed on lit trading venues, but certain transactions need to be executed through dark venues.

“The fact that some transactions continue to be executed in a manner that is not pre-trade transparent is not an indication that the MiFID II transparency framework is inadequate, but rather that the nature of those transactions is such that it is not necessarily feasible or beneficial from a client/investor perspective to execute them in a lit trading environment,” AIMA said.

“We would caution against radical changes to the existing DVC given the potential to destabilise markets and given the significant resources that have already been expended by industry to operationalise the MiFID II requirements.”

The review from ESMA also targeted another controversial consequence of MiFID II – the SI. The SI regime requires investment firms to assess whether they are SIs for various assets on a quarterly basis, based on data from the prior six months of activity. If firms exceed thresholds from the calculations, they are considered an SI under MiFID II and have to fulfil SI obligations.

SIs could see some far-reaching changes from the review of MiFID II, with ESMA going so far as to outright ask market participants if they think the execution venues should be banned under the share trading obligation (STO). Concerns have long-been voiced that activity traded on SIs is not transparent enough, and the re-emergence of SIs under MiFID II has caused fragmentation.

“We do not support this at all,” said Baillie Gifford’s response, authored by Adam Conn, head of trading. “In our opinion it is essential investors maintain the ability to make in-formed decisions where they choose to trade. SI’s perform a role in providing liquidity, through the provision of risk capital or crossing of natural blocks between a buyer and seller.”

Asset managers overall largely rejected the proposal to eliminate SIs as an eligible execution under the STO, with many echoing Conn and pointing out to the regulator that SIs are a crucial part of the trading and liquidity landscape.

“We strongly oppose the removal of SIs as eligible execution venues for the purpose of the STO,” BlackRock said. “Systematic Internalisers play a crucial role of providing principal liquidity for large trade sizes. This is vital for investors both in calm and in disrupted markets. For that reason, it is essential to safeguard SIs.

“We understand that there is concern around the role that SIs play in the market ecosystem and questions around transparency. These are best addressed by strengthening the SI’s ability to provide meaningful principal liquidity. Further, a consolidated tape and EBBO can further contribute to better transparency of European markets.”

Efforts to develop a consolidated tape in Europe have been thwarted in the past due to concerns around the high costs of developing a tape in a restrictive regulatory environment with a lack of clear commercial benefits, despite widespread pleas from participants in both equities and non-equities. MiFID II laid out requirements for voluntarily consolidated tape providers, but it did not mandate the establishment of a consolidated tape that firms would have to submit transaction data to, as is the case in the US.

“Rather than focus on shifting trading back to lit primary markets to the detriment of the end investor, improved standardisation of data, via a consolidated tape, would enable regulators to robustly monitor and supervise markets, yet still enable best execution to continue as it should, lowering the cost of investment in the process. That is how investor confidence in European Capital markets can best be restored,” Conn added in Baillie Gifford’s response.

Following a consultation on the launch of a consolidated tape in July, ESMA stated that despite the challenges, it will recommend the establishment of a consolidated tape for European equities to the European Commission. The deadline for responses to the MiFID II review consultation have also been extended due to the coronavirus pandemic until 18 May.

“A successfully governed European consolidated tape would be transformative for markets and for investors,” BlackRock added. “It would bring clear benefits; increasing transparency and strengthening best execution, while simultaneously improving competitiveness of European capital markets and contributing to the delivery of Capital Markets Union (CMU).”

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What does it mean to you personally to be appointed the UK Affiliate Board Chair for HFC?

This year, the Alternative Investment Management Association (AIMA) is celebrating its 30th anniversary and I am using both that and my new position as the Chair to increase the fundraising profile of HFC, leveraging AIMA particularly around the gala dinner where all funds raised are in aid of HFC.

I feel very honoured to be asked to take up the role. Having been involved in the hedge fund community for almost exactly 30 years, the fit is a really good one. I have had a long professional career, and when you get to a certain point you start to think should I give something back, so the timing was perfect for me. In a world where we are looking for more purpose in the things we do, it married up perfectly with my way of thinking.

I have known Gunner (Bukhart) for a number of years, and have been involved with the charity with some time in various things, both in activities undertaken by myself and attending their events. It is hard to not get affected by the sheer number of children that are being abused or neglected, and it was because of that which made me sit up and take notice.

How have you previously been involved with the charity? Was there any event that was particularly challenging?

I have been involved in the various fundraising efforts that had been done through events and raising sponsorship through their network.

The hardest event I took part in was in 2016 when I was asked to take part in the annual cycle ride at Monte Ventoux in France. Without thinking I said yes but did not own a bicycle at the time. It was then one of the most iconic hill climbs in world cycle that involved not one but three climbs in one day. It was quite sobering going up one of the ascents, you go past a memorial to former English rider Tommy Simpson who was the only person to die in the Tour de France going uphill. I shared a lot of sweat and energy doing that, and the satisfaction of completing it and raising a lot of money made it worth it.

Do you have any goals set out for the charity going forward? 

The immediate goal is to enforce this sense of a community charity. When it was first born, HFC stood for ‘hedge funds care’. I want to emphasise that from my own network and the AIMA community to draw in more members, to expand the awareness of HFC, and that the charity that is rooted in the alternatives industry. Therefore we are aiming to get more involved, whether through volunteer level, fundraising, donations, or attending our events. I think we have a great opportunity to double awareness of the work being done, and encourage the hedge fund community to take a closer look and become more involved. I want to use this year as AIMA 30th anniversary to leverage both for the common good.

I am looking forward to having a director involved in the grantee charities – someone that has that direct experience with where the money is going, and seeing the difference we are making, will multiply the level of satisfaction by many fold.

According to the most recent report on child abuse cases from 2018, there were 80,000 child sexual offenses reported by police. That is extraordinary and gives you a sense of the magnitude of the problem. Our charity gives grants to other charities we think will make a difference. It is a part of the success of HFC – we use academics that specialise in social work, and they not only help us select and carry out the due diligence in grant making, but make sure what we give makes measurable results. I think we have a good process in place to ensure we get results.

How can the charity further engage with the hedge fund community? 

What I really want to see is more managers getting involved with us. We need to get out more with our board and other volunteers to the management community. Service providers have been fantastic to what they have done for the charity through sponsorship and participation, but I think there is a chance for broader participation from the community. With the lines of hedge funds getting less defined with investing in private equity, I think we can also broaden out this community.  

It is a global charity, leveraging the connectivity that goes on so well in the US chapters, particularly our HQ in New York, so we can continue our work internationally.

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He is replacing former SEC commissioner Kathleen Casey, who has served as chair of AIMA since September 2012.

Between 1993 and 1996 Lorne also worked at the SEC as general counsel. He has also held roles at Soloman Brothers and Citigroup. 

Eva Sanchez from Citadel Europe and Choo San Yeoh from Albourne Partners are also stepping down from the board.  

There are four new additions to the AIMA council, including global head of compliance at Brevan Howard Asset Management, Ryan Taylor, and chief investment strategist at Protege Partners, Michael Weinberg. 

Jack Inglis, chief executive officer at AIMA said the board will continue “to address the big issues facing alternative investment fund managers around the world”. 

AIMA’s new board will be in place from September this year until September 2018.

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