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A topic of great interest to {{tag|UCITS}} funds, {{tag|Alternative Investment Fund}}s, {{tag|Prime Broker}}s, {{tag|Custodian}}s and {{tag|Sub-Custodian}}s.
{{a|aifmd|}}{{a|ucits|}}{{depositary}}
A topic of great interest to [[UCITS}} funds, [[Alternative Investment Fund]]s, [[Prime Broker]]s, [[Custodian]]s and {{tag|Sub-Custodian]]s.


==={{tag|AIFMD}}===
===[[AIFMD]]===
The key section of AIFMD is Article {{aifmdprov|21}}. That, in a {{nutshell}}, provides:
The key section of AIFMD is Article {{aifmdprov|21}}.
{{Quote|{{aifmdprov|21}}: {{aifmdprov|Depositary}} <br>
===[[UCITS]]===
(1) AIFM must ensure each AIF has a singe Depositary.<br>
The key section of UCITS V is Article {{ucits5prov|22a}}.
(2) Appointed by written contract meeting certain minimum criteria of {{tag|AIFMD}}. <br>
{{sa}}
(3) Depositary must be
*'''{{aifmdprov|Depositary}}''' - [[AIFMD]]
:(a) An authorised EU credit institution;
*'''{{ucits5prov|Depositary}}''' - [[UCITS]]
:(b) an EU investment firm meeting certain capital adequacy criteria;
:(c) an entity subject to prudential regulation that is deemed ok under {{eudirective|2009|65|EC}} <br>
For Non-EU AIFs the depositary can be an equivalent credit institution or investment firm outside the EU (I think). There are also exceptions for illiquid AIFs that don't invest in custodiable assets. <br>
(4) To avoid conflicts between AIFM, AIF and investors: <br>
:(a) {{tag|AIFM}} can't be a depositary <br>
:(b) a Prime Broker to an AIF can't be a depositary unless appropriate Chinese walls and conflict management processes are in place; however it may delegate of custody tasks as per {{aifmdprov|21(11)}} (and {{aifmdprov|21(8)}}; <br>
(5) Depositary must be established in either:<br>
:(a) home Member State of the AIF; <br>
:(b) for non-EU AIFs, in the country of the AIF, the home Member State of the AIFM, or i the "Member State of reference of the AIFM (don't you just LOVE THIS GAME???!) <br>
(6) If established in a non-EU state per {{aifmdprov|21(5)}}(b), there are certain other conditions that must be met;
(7) The depositary is required to ensure that  <br>
:AIF's cashflows are properly monitored <br>
:subscription payments are properly received and booked in the depositary's accounts <br>
(8) AIF's assets are entrusted to the Depositary for safekeeping as follows:
:(a) for custodiable assets:
::(i) depositary should hold in custody all assets that can be registered in its books or physically delivered to it;
::(ii) depositary should ensure the assets are held within segregated accounts in its books opened in the name of the AIF or AIFM so they can be clearly identified as beloing to the AIF at all times
:(b) for non-custodiable assets there are some rules too <br>
(9) in addition the depositary must look after issue and cancellation of shares and units, calculation of NAVs, remittance of consideration and so on. <br>
(10) '''Standard of Conduct''': Depositary must act honestly, fairly, professionally, independently and in the interest of the AIF and the investors of the AIF and avoid conflicts of interest; note the depositary cannot reuse assets of the AIF without the AIF's prior consent; <br>
(11) '''Delegation''': Depositary can't delegate to third parties, except for parapgraph {{aifmdprov|21(8)}}, wherein it is ok as long as:
:(a) not intended to avoid requirements of AIFMD;
:(b) there is an "objective reason" (?? search me) for the delegation.
:(c) depositary has exercised all due skill, care and diligence in selecting the delegate;
:(d) the delegate ([[sub-custodian]]):
::(i) has adequate expertise and structures
::(ii) for custody, is subject to effective prudential regulation;
::(iii) segregatres client assets from its own assets and the depositary's assets so they can be clearly identified as belonging to clients;
::(iv) No uise without prior consent of the AIF and prior notification to the depositary;
::(v) Delegate complies with 21(8) and 21(10). <br>
certain guff about subdelegation where required by laws of third party}}
(12) '''Liability''': the depositary is liable for the loss of assets.

Latest revision as of 13:30, 14 August 2024

AIFMD Anatomy™
Directive 2011/61/EU (EUR Lex) | Implementing regulation 231/2013 (EUR Lex)
Navigation
directive - 21 (depositary) | 21(4) (conflict management) | 21(8) (custody function) | 21(11) (custody delegation) | 21(12) (liability for loss of assets) | 21(13) (discharge of liability on delegation) | 21(14) (discharge of liability for Non-EU subcustodians) | 36 (depo-lite) | 36(1)
implementing regulation DR20 (Due diligence when appointing counterparties and prime brokers) | DR76 (objective reason) | DR89 (Safekeeping duties with regard to assets held in custody) | DR91 (reporting obligations for prime brokers) | DR98 (due diligence) | DR99 (segregation obligation) | DR100 (Loss of custody asset) |
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UCITS Anatomy™
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What is a depositary?

Every UCITS or AIF must appoint an independent depositary, which must be a bank or regulated investment firm based in the fund’s home jurisdiction. To avoid conflicts of interest, generally neither the fund’s own investment manager nor its prime broker (if it has one) can act as a depositary, though the depositary can delegate certain of its functions to the prime broker, as we shall see.

In what follows we discuss the AIFMD depositary provisions. If you want to compare those with the UCITS depositary provisions, see the JC’s handy Depositary comparison under AIFMD and UCITS feature. Neat, huh?

What does a depositary do?

It’s an analogue to what those crazy guys in the Cayman Islands call a fund administrator. The depositary’s job is to:

What is a depositary’s liability?

Liability is covered by Article 21(11) of AIFMD. The depositary is liable to the fund for the loss of custody assets, even where it has delegated the custody function to a third party. Liability is strict: it can only escape liability if the loss was caused by an “an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary”. That doesn’t include delegating to a prime broker.

Can a depositary delegate its functions?

Yes, some of them. This is covered by Article 21(11) of AIFMD. Importantly, from a prime broker’s perspective, the custody function. If the prime broker holds the asset it not only has security over it, but it can rehypothecate it. As devoted readers of this site will know[1], rehypothecation is a very important part of the economics of margin lending.

There are strict conditions to the delegation, and it tends to comes with strings attached.

“Delegation” is different from “sub-contracting”: delegation means the third party delegate contracts with the fund directly to perform the function, without the depositary intermediating. This is why it is important that the depositary remains strictly liable for the performance of the delegated function. There is much more on this topic in the article on delegation.
A topic of great interest to [[UCITS}} funds, Alternative Investment Funds, Prime Brokers, Custodians and {{tag|Sub-Custodian]]s.

AIFMD

The key section of AIFMD is Article 21.

UCITS

The key section of UCITS V is Article 22a.

See also

  1. ↑ Other people might know this too.
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