Risk Management - December 21, 2012

The ultimate goal should be to ensure that no player is in a capacity to disregard its own responsibility for risk management - an interview with Jean-Marc Eyssautier

In this month’s interview, Jean-Marc Eyssautier, Chief Risk and Compliance Officer for CACEIS Group and member of the CACEIS Executive Committee, discusses the latest publication from the CACEIS research chair at EDHEC-Risk Institute on “Risk and Regulation in the European Fund Management Industry,” and notably the specific recommendations contained in the study, and his hopes for the new research chair at EDHEC-Risk Institute supported by CACEIS, "New Frontiers in Risk Assessment and Performance Reporting."

Jean-Marc Eyssautier

The latest publication from the CACEIS research chair at EDHEC-Risk Institute on “Risk and Regulation in the European Fund Management Industry” contains an overview of non-financial risks in the wake of the financial crisis and suggests a new, more parsimonious approach to regulation, focusing on incentives towards proper risk management and transparency instead of the usual long lists of prohibitions and obligations. Do you agree with this suggestion?

Jean-Marc Eyssautier: In a context where self-regulation has clearly shown its limitations, legislative and regulatory intervention is legitimate since it provides the framework to be followed by all stakeholders. This is crucial in an environment of free movement of capital that cannot exist without involving certain prohibitions and obligations. The difficulty lies in going beyond imposing purely restrictive proposals, and taking advantage of the regulatory framework over the long-term to improve the knowledge and understanding of what is an acceptable level of risk for each player. This is what is proposed by EDHEC-Risk and I believe it is a very useful contribution.

What do you think of EDHEC-Risk’s recommendation to align the liability regime of UCITS depositaries with that of the AIFMD, notably allowing the same contractual discharges and related transparency obligations, and simultaneously encourage the creation of a subset of UCITS (“restricted UCITS”) that would be covered by an unconditional guarantee of restitution, with relief limited to narrow force majeure circumstances?

Jean-Marc Eyssautier: We do not believe it is reasonable that for the same type of asset, depositary liability should be different depending on whether it belongs to an AIF or an UCITS. In fact, these two categories of funds are characterised primarily by specific rules regarding the eligibility of the assets and the conditions of their distribution. This seems both clear and sufficient.

With regard to the success of a class of "restricted" UCITS, we are of the opinion that it will mostly depend on the level of understanding and appreciation of the non-financial risks by the investors, and on their willingness to pay a premium for this guarantee. We therefore consider EDHEC’s proposal as a contribution to the overall process of clarification of the imbedded risks in funds and to a greater accountability of all stakeholders.

If we look again at the specific recommendations in the publication, EDHEC-Risk suggest that best practices for transparency and management of non-financial risks should be promoted by rating funds and making these ratings publicly available, and that prescriptive disclosures on non-financial risks should be required in the fund’s prospectus and Key Investor Information Document (KIID). What is your view of these recommendations?

Jean-Marc Eyssautier: Ever since the beginning of the UCITS IV initiative, CACEIS had highlighted that the new provisions on the content of the sales documentation were much too laconic when addressing the disclosure of non-financial risks. Thus, we clearly support EDHEC’s approach to enhancing the KIID in this respect.

More generally, these proposals lead in the right direction as they meet the combined objectives of increasing transparency and stakeholder accountability. This would also add impetus to the spread of good practices such as those applied by depositaries like CACEIS in its sub-custodians selection (due diligence procedures, on-going monitoring...).

Finally, EDHEC-Risk puts forward the idea that capital requirements linked to non-financial risks should be imposed across all links in the chain of fund management. These capital requirements should correspond to the reality of the non-financial risks taken by each actor in the asset management value chain and be calculated according to the measures implemented by these same actors for sound management of the non-financial risks to which they are exposed. What is your opinion?

Jean-Marc Eyssautier: CACEIS is an advocate of any initiative leading to gain a better understanding of the level of risk generated and managed by each stakeholder. This position also forms the basis for our decision to sponsor EDHEC-Risk’s research chair. We believe that the ultimate goal should be to ensure that no player is in a capacity to disregard its own responsibility for risk management. Adapting capital reserves, or taking out specific insurance coverage, and as well as paying special attention to the strengthening of the overall risk management function, are undoubtedly promising options.

Are there any other conclusions from this research that you think are worth highlighting?

Jean-Marc Eyssautier: Having had multiple opportunities to present this work to the asset management industry in partnership with EDHEC-Risk, I feel that the industry has made significant progress in raising its awareness of these non-financial risks and in working towards more robust and sophisticated solutions rather than relying solely on the "deep pockets" of the fund depositary.

The next phase of research within the chair supported by CACEIS will begin with recommendations on improved risk reporting. What are your hopes for this new research?

Jean-Marc Eyssautier:The stimulating and challenging nature of the work we undertake with EDHEC-Risk and the response our publications have received encourage us to continue on the same track.

CACEIS has thus decided to sponsor a new chair entitled "New frontiers in risk assessment and performance reporting." We believe that this work will result in another step forward for our business as it is at the crossroads of the needs of our clients (which are constantly growing due to regulatory changes) and to the services a major Custody and Depositary player should be able to offer the asset management industry.

About Jean-Marc Eyssautier

Jean-Marc Eyssautier is a graduate of Institut d’Etudes Politiques, Paris and holds a Bachelor’s degree in English. He started his career at Banque de France in 1987, firstly as a Branch Deputy Manager and then as Manager of the Securities Settlement Department. In 1995, he joined Sicovam SA (now Euroclear France) where he held several positions including Project Manager for RGV, Head of Sales for France and worldwide, and, finally, Deputy Managing Director in 2000.

He joined CDC IXIS as Head of Operations in 2001. In 2004 he was appointed a member of the IXIS IS Management Board and Managing Director of IXIS Administration de Fonds. During IXIS IS’s merger with CA-IS in 2006, he was appointed Managing Director of CACEIS Bank. Jean-Marc Eyssautier has been Chief Risk and Compliance Officer for CACEIS Group since October 2008 and was appointed to the CACEIS Executive Committee in June 2010.

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