DUBLIN (Reuters) - One of Europe’s top regulators has some good news for the hedge fund industry; pay curbs are not on the agenda.
While they will avoid the caps on bonuses facing bankers, Europe’s hedge fund managers can still expect restrictions on the manner and timing of their pay under new regulations coming into force on Monday.
The Alternative Investment Fund Managers Directive (AIFMD) is the European Union’s attempt to help protect investors and Gareth Murphy, a former hedge fund manager and equity derivatives trader with JP Morgan (JPM.N), is one of the key figures behind it.
“We are only beginning to see how it is going to play out,” Murphy said in an interview in his office in Dublin, where he now heads the markets division at the Irish central bank.
As chairman of the committee dealing with investment management at the European markets watchdog ESMA, Murphy helps frame regulation for funds based in the European Union, with around 8 trillion euros in assets under management.
AIFMD, which effectively creates a single market for hedge funds in the 28-nation bloc, requires managers to comply with a host of new regulations. These include minimum capital levels and disclosures to investors and regulators. One rule will limit the amount of any bonus paid in cash to 50 percent of the total.
Critics argue that the rules could increase systemic risk in the industry by driving some funds outside the European Union, where they can trade with less scrutiny.
Murphy disagrees. Under AIFMD, funds based in the EU qualify for a ‘passport’ allowing them to be sold in every member state, encouraging funds to come into the fold to reach more clients.
”Firms have applied to us for AIFM (Alternative Investment Fund Manager) authorisations and some of them are looking to get up and running as quickly as possible,“ he said. ”These are the headline names in the asset management space.
“I am sure we will see a new surge of applications within the new world.”
Hedge fund managers face a transitional year before the new rules take full effect. Many are looking to see whether any EU states opt out of some or all of the remuneration guidelines.
Malta, which competes with Luxembourg and Ireland as a hub for international funds in the Union, recently said it would not apply the remuneration guidelines to “delegates” - managers based outside the EU who work for hedge funds inside it.
Britain’s financial regulator said last month it has still to decide whether or not to comply in full with the remuneration guidelines.
Ireland, the world’s biggest centre for hedge fund administration, would face a competitive disadvantage if other countries did not adopt the rules on pay.
“It would raise significant questions for sure,” said Murphy.
“I appreciate that there are challenges there. Those challenges are particularly acute if other jurisdictions don’t deliver similar sorts of remuneration rules.”
Ireland’s funds and investment management industries, which Murphy supervises, have remained largely divorced from the woes of the country’s banking sector, which forced the government into an EU-IMF bailout in 2010.
But he has felt a sense of shame over the behaviour of Irish bankers, caught joking about the bailout in taped conversations recently aired in the media: “It is a source of embarrassment without doubt,” he said. “We are conscious of that.”
The 43-year-old native Dubliner has relished helping overhaul the central bank in the aftermath of the crisis. After joining in the autumn of 2010, he added 60 people to a division now numbering 160.
He is also pushing the use of technology. When his division moved to their current offices in late 2010, the funds authorisation section had to be located in the basement to ensure tonnes of paper did not put a strain on the building.
The central bank is now aiming for a fully paperless fund authorisation process by the first quarter of next year.
While his role at the central bank and within ESMA is less of an adrenalin ride than his days on the trading floor, Murphy likes the challenge nonetheless: “Bismarck likened making laws to making sausages,” he said. “I think it is quite interesting to be inside the sausage machine at this point in time.”
Editing by Alastair Macdonald