Asset management firms face a steep hurdle in order to comply with new European Union capital adequacy and risk management rules, called Solvency II.

“Solvency II requires insurance companies to prove they have enough capital funding to prevent them from failing, placing a significant reporting burden on asset managers who will be required to provide unprecedented levels of transparency on the investments of their insurance company clients,” said Ronan Brennan, chief technology officer at MoneyMate, a provider of investment data management solutions.

Once Solvency II comes into effect, asset managers will have to facilitate a timely report of line-level holdings for all funds they are managing and must provide a full look-through until the report has just ‘leaf’ level holdings.

While Solvency II is of European origin and primarily targeted at the insurance industry, it has global implications for the asset management community.

“For the first time I can remember, a piece or European legislation is driving a lot of discussion in the U.S.,” said Brennan.

For example, asset management firms that are affiliated with a European-based insurance company such as Pimco, a bond portfolio manager that’s owned by German-based Allianz, will be subject to the new regulations.

“Pimco has a high level of exposure to Solvency II, even though it’s a U.S. company,” said Brennan.

A major goal is to reduce the cost of compliance overheads, to avoid it being a drag on the company.

“It’s easier to cut cost in anything when the objective is neatly defined; that’s why regulatory clarity is a key first step,” said Brian Barnier, principal analyst and advisor at ValueBridge Advisors. “Then, the company can simplify the process needed to deliver the objective.”

Asset managers are being warned that the upcoming European directive, which is scheduled to come into effect from January 1, 2014, is not just a problem for the insurance industry but is also one that rests firmly on their doorstep.

“Many asset managers that have no connection to an insurer parent will also have serious exposures,” said Brennan at MoneyMate.

With a €7.5 trillion investment portfolio, insurers are significant investors in funds and asset managers who can market their funds as Solvency II friendly will have a competitive edge, he said.

MoneyMate has developed a data management “look-through” service to capture and deliver fund holdings data.

With the service, asset managers can meet reporting requirements but still control access to holdings data so that look-through can be realized within a secure environment, while protecting the asset manager’s investment strategy, Brennan said.