EUROPE - Solvency II could force asset managers to disclose their investment strategies "inadvertently" if Brussels adopts a 'look-through' approach for pooled vehicles, State Street Global Services has warned. 

The current third pillar of the Solvency II framework sets out how insurers must report their solvency positions.

This requires asset managers to provide a much more granular level of reporting for pooled investment funds such as mutual funds, hedge funds and securitised products.

This 'look through' approach aims to assess and manage the investors' risk profile and the risks embedded in investment funds, while 'look through' reporting will also be used in the calculation of the capital adequacy requirements.

Mark Westwell, regional client management executive for the EMEA region, said: "If a client such as an insurance company or indeed a pension fund - in the event Brussels adopts a Solvency II playing field approach within the revised IORP Directive - is investing through several pooled vehicles, the regulator will want to know exactly what the collective amount invested in any one particular asset is."

By revealing that precise amount, asset managers could "inadvertently" disclose their investment style, as they will be required to break down that total investment into pieces in order to reflect the pools of funds in which they are investing in, Westwell said.

He also pointed out that, under the Solvency II regime, insurers and their asset managers must deliver asset data consistently in a "complete, accurate and appropriate" format and more quickly than they are currently accustomed to.

"The fact asset managers will provide the variety of asset data in a quick and consistent format will provide significant challenges, as the data itself involves different jurisdictions, different asset classes and pooled vehicles via multi-managers and other third parties," he added.

"Clients are finding that the most efficient way to do this is to have all the linkages and the feeds from various sources coming into a central, consolidating data warehouse or repository. That, in turns, mean data will have to be tested, consolidated and enriched."

However, some asset classes such as derivatives remain more opaque and therefore more difficult to define and collate for reporting purposes.

"A certain amount of enrichment and validation needs to take place," Westwell said, "and then, of course, an independent entity is arguably best placed to consolidate and verify asset data before it is released in a consolidated and consistent format to the clients."

This explains why a large number of asset managers are now looking for third-party providers to take charge of the validation work, he said.