Superpowers Clash

Fans of superpower action movies often divide into clear ideological camps. Some swear by the shield-tossing Captain America, others by the acrobatic Catwoman, and still others by the techno-gadget-using Ironman. Those with superpowers tend to be solitary creatures, and while there is no shortage of team-based comic books to adapt into blockbuster films, many movies portray the superpower-wielding hero working alone. That’s no big surprise, of course – it has to be tough to explain violent fits of rage (not to mention turning green), secret web-spinning tendencies, or the ability to lift cars with only a pinky after never having joined a gym. Even when the mighty protagonists need a little assist, it’s very clear who runs the show and who is the sidekick.

But now, thanks to aggressive director Zach Snyder, we are about to witness typical action film-making preconceptions being shattered as though by a lightning bolt from Thor. Snyder has a grand plan to put Batman and Superman on the same screen at the same time, at first fighting against each other and then shelving their grievances to battle a foe greater than either of them. Among those who love the genre, the internet is ablaze with leaked rumors and many questions about the coming film, Batman v. Superman: Dawn of Justice.

The scope of this film will be unprecedented; filmmakers recently had thousands of extras converge on Detroit, with the express requirement that they had to have military backgrounds. (Not since every New Zealander who knew how to ride a fast horse appeared in The Lord of the Rings have so many specialized extras been required.) The convergence of two generally reclusive superpowers will raise many questions, most especially, how can they possibly work together? And the future impact of this story will be massive, as all other blockbuster directors scratch their heads to figure out how to top Batman’s epic brawl with Superman.

The dramatic confluence of two ultra-powerful forces on screen like this sounds familiar to anyone who has been preparing for the regulatory convergence of the Alternative Investment Fund Management Directive (AIFMD) and European Market Infrastructure Regulation (EMIR). These regulations, each substantial and sweeping in their own right, apply to any asset managers who market or manage funds in Europe and use derivatives to hedge their fund-level or asset-level risks. For those who have heretofore only been governed by one of them, their sudden application in tandem has the potential to feel like being caught in a powerful web and beaten with a mighty hammer.

What is the scope of the regulatory impact? The scope of these two regulatory frameworks is significant: asset managers who market or manage funds in Europe and use derivatives to hedge their risks, whether fund-level or asset-level, will need to comply with both. EMIR stipulates certain policies and procedures, timely confirmation and reporting, and portfolio reconciliation, while AIFMD obligates transparency, capital, external valuation, and risk and liquidity management actions. As a result, firms will face increased transactional and operational complexity.

How will the two regulatory frameworks converge? This summer brings significant new requirements for fund managers under AIFMD, wherein authorized funds now become “financial counterparties” under EMIR. The two regulatory regimes work in tandem: while AIFMD requires independent valuation of all fund assets and liabilities (including derivatives) along with an independent risk management function, EMIR mandates daily reporting of both fund-level derivative valuations and collateral valuations. Financial firms must also adopt detailed valuation policies and procedures, and face increased portfolio reconciliation requirements. Working to ensure compliance with the converged framework will take nothing short of regulatory superpowers.

What are the anticipated future impacts of this convergence? In addition to the current requirements for funds under AIFMD and EMIR, future obligations yet to be codified will also apply. Potentially, all fund-level derivatives may face central clearing or collateral posting for non-cleared trades next year, and there may even be required reporting for historical derivatives that were outstanding in 2012 even if no longer outstanding today. For fund managers, regulatory compliance now and in the future will require detailed knowledge of regulations and intelligent solutions to fit specific needs and budgets lower than what Zach Snyder will spill on special effects.

Contemplating the scope, convergence, and future impact of various derivatives regulations can make even the most astute person feel like a woozy Superman, wearing a kryptonite necklace and submerged in a swimming pool. Thankfully, the antidote exists – attend our webinar on Tuesday, September 9th and find out the full implications and practical solutions of AIFMD and EMIR’s convergence for fund managers. Or give us a call at 610.925.3120 or email us.