Depositary

A topic of great interest to UCITS funds, Alternative Investment Funds, Prime Brokers, Custodians and Sub-Custodians.

===AIFMD=== The key section of AIFMD is Article 21. That, in a Nutshell™, provides:

21: Depositary

(1) AIFM must ensure each AIF has a singe Depositary.
(2) Appointed by written contract meeting certain minimum criteria of AIFMD.
(3) Depositary must be

(a) An authorised EU credit institution;

(b) an EU investment firm meeting certain capital adequacy criteria;

(c) an entity subject to prudential regulation that is deemed ok under 2009/65/EC (EUR Lex)

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.
(4) To avoid conflicts between AIFM, AIF and investors:

(a) AIFM can't be a depositary

(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 21(11) (and 21(8);

(5) Depositary must be established in either:

(a) home Member State of the AIF;

(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???!)

(6) If established in a non-EU state per 21(5)(b), there are certain other conditions that must be met; (7) The depositary is required to ensure that

AIF's cashflows are properly monitored

subscription payments are properly received and booked in the depositary's accounts

(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

(9) in addition the depositary must look after issue and cancellation of shares and units, calculation of NAVs, remittance of consideration and so on.
(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;
(11) Delegation: Depositary can't delegate to third parties, except for parapgraph 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).

certain guff about subdelegation where required by laws of third party

(12) Liability: the depositary is liable for the loss of assets.