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[[File:Depositary delegation.png|thumb|right|When a [[depositary]] ''[[delegation|delegates]]'' its safe-keeping function. It remains responsible for it, but is not in the [[custody chain]].]] | [[File:Depositary delegation.png|thumb|right|When a [[depositary]] ''[[delegation|delegates]]'' its safe-keeping function. It remains responsible for it, but is not in the [[custody chain]].]] | ||
[[File:Depositary subcontracting.png|thumb|If a [[depositary]] [[sub-contract]]s its safe-keeping function. The depositary stays in the [[custody chain]]. This is not so appealing for a [[prime broker]] with designs on [[security]] and [[rehypothecation]].]] | [[File:Depositary subcontracting.png|thumb|If a [[depositary]] [[sub-contract]]s its safe-keeping function. The depositary stays in the [[custody chain]]. This is not so appealing for a [[prime broker]] with designs on [[security]] and [[rehypothecation]].]] | ||
===[[Delegate]] versus [[Sub-contract|sub- | ===[[Delegate]] versus [[Sub-contract|sub-custodian]]=== | ||
''Be warned: There are people more learned in the ways of the world than [[your correspondent]] who do not share this view.'' Let’s call it a ''dissenting judgment'' therefore. But it’s a cracker. | ''Be warned: There are people more learned in the ways of the world than [[your correspondent]] who do not share this view.'' Let’s call it a ''dissenting judgment'' therefore. Or a piece of ''contrarianism''. But it’s a cracker. | ||
====The difference betwixt==== | ====The difference betwixt==== | ||
[[Delegation]], according to a natural definition, means “to entrust (a task or responsibility) to another person, typically one who is less senior than oneself.”<ref>{{google2|Define|Delegation}}</ref> So: | [[Delegation]], according to a natural definition, means “to entrust (a task or responsibility) to another person, typically one who is less senior than oneself.”<ref>{{google2|Define|Delegation}}</ref> So: | ||
:''Dear Sir/Madam: Let me introduce you to my glamorous assistant, Igor, who will carry out this work for you under my supervision. while your day-to-day interaction will be with Igor, I remain your loyal servant, and shall be answerable to you for Igor’s timely and competent performance.'' | :''Dear Sir/Madam: Let me introduce you to my glamorous assistant, Igor, who will carry out this work for you under my supervision. while your day-to-day interaction will be with Igor, I remain your loyal servant, and shall be answerable to you for Igor’s timely and competent performance.'' | ||
Being ''[[Delegation|delegated]]'' a [[custody]] function — agreeing to act, as {{t|AIFMD}} puts it, “at the first level of a [[custody chain]]”, as | |||
*'''Delegate''': A | Being ''[[Delegation|delegated]]'' a [[custody]] function — agreeing to act, as {{t|AIFMD}} puts it, “at the first level of a [[custody chain]]”, as the direct [[custodian]] to a [[fund]] ''[[on behalf of]]'' the [[depositary]] whom the [[fund]] has appointed to carry out that function is, in this old fool’s view, not the same being the [[depositary]]’s [[sub-custodian]]. It is really quite different: | ||
*''' | *'''Delegate''': A [[depositary]] who delegates its custody function ''steps out of the custody chain''. It won’t hold the client’s assets ''at all''. It will instead pass that responsibility to the [[delegate]] — usually, a [[prime broker]] with designs on a spot of [[rehypothecation]]. The delegate will record the end-client’s interests in the [[custody asset]]s directly in its own books and records — that is, the [[delegate]] itself, ''and not the [[depositary]]'', will be “at the first level of the [[custody chain]]”. | ||
:*True; the [[delegate]] may have to report everything it does to the [[depositary]], but the [[delegate]]’s record, not the [[depositary]]’s will be the “golden source” record of the safekeeping client’s assets. The [[depository]] might ''copy'' the [[delegate]]’s report, but the [[delegate]]’s books will be what count. | |||
:*Note that a custody [[delegate]] can see the ultimate client and, should it have lent money to that end client, it has enough control over that client’s assets to (i) take [[security]] over them, and (ii) defray its financing costs by [[rehypothecating]] them. For someone in the business of [[margin lending]] — say, a [[prime broker]] — these are pretty fundamental abilities, so expect [[prime broker]]s to be ''very'' enthusiastic about being [[Delegate|delegated]] a [[depositary]]’s [[safekeeping]] function. They will be a lot less keen on being the depositary’s ''sub custodian'', on the other hand. | |||
*'''Subcustodian''': A [[subcustodian]], by contrast, stands ''behind'' the “first level” [[custodian]]. The [[ultimate client]] cannot (directly) see it, and it cannot see the [[ultimate client]]. A sub-custodian holds the [[custodian]]’s client assets in a single [[omnibus]] account, in the [[custodian]]’s name but marked as “client assets” and therefore unavailable for the [[main custodian]]’s creditors. If the main custodian were not obliged to tell you about its sub-custodians, you would not even know they were there. A [[sub-custodian]] holds assets for the main [[custodian]], only ''sees'' the [[main custodian]], and won’t know who its individual clients even are, let alone which assets it holds for the main custodian belong to which clients, much less have a direct interpersonal or contractual relationship with those clients. Since it doesn’t know to whom they belong, a sub-custodian won’t be in a position to take security over or [[rehypothecate]] any assets it holds<ref>Except to cover its own direct custody costs.</ref> — hence it ought to be happy enough signing a [[no lien letter]]. | |||
'''Careful though''': Both CASS and {{tag|AIFMD}}/{{tag|UCITS}} are a little sloppy in their use of the word “[[delegation]]”, using it on occasion to mean something that is probably meant to refer to a [[subcontract]]ing arrangement<ref>See, for example {{tag|CASS}} {{cassprov|6.3.4}}, and the flush text after {{tag|AIFMD}} Article {{aifmdprov|21(11)}}(d).</ref>. {{tag|CASS}} only really talks about [[subcontract]]s, though {{tag|AIFMD}} and {{tag|UCITS}} deal with true [[delegation]] ''and'' [[subcontract]]s. | '''Careful though''': Both CASS and {{tag|AIFMD}}/{{tag|UCITS}} are a little sloppy in their use of the word “[[delegation]]”, using it on occasion to mean something that is probably meant to refer to a [[subcontract]]ing arrangement<ref>See, for example {{tag|CASS}} {{cassprov|6.3.4}}, and the flush text after {{tag|AIFMD}} Article {{aifmdprov|21(11)}}(d).</ref>. {{tag|CASS}} only really talks about [[subcontract]]s, though {{tag|AIFMD}} and {{tag|UCITS}} deal with true [[delegation]] ''and'' [[subcontract]]s. |