Template:Delegate vs subcontractor: Difference between revisions
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*A [[subcustodian]] is an entity who stands behind the main custodian and 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 prime broker's creditors. A [[sub-custodian]] won’t know who the custodian's clients are, let alone which assets are attributable to which clients, much less have a contractual relationship with those clients, and won’t be in a position to [[rehypothecate]] any assets it holds. | *A [[subcustodian]] is an entity who stands behind the main custodian and 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 prime broker's creditors. A [[sub-custodian]] won’t know who the custodian's clients are, let alone which assets are attributable to which clients, much less have a contractual relationship with those clients, and won’t be in a position to [[rehypothecate]] any assets it holds. | ||
'''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 a [[subcontract]]<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. | ||
====Why delegate?==== | ====Why delegate?==== | ||
Why do depositaries delegate their custody functions under AIFMD and UCITS then? Market structure is why. | Why do depositaries delegate their custody functions under {{tag|AIFMD}} and {{tag|UCITS}} then? Market structure is why. | ||
*AIFs and UCITS funds are required to have a local depositary to look after the fund’s interests, make sure it is properly managed, and to look after its assets. The | *AIFs and UCITS funds are required to have a local [[depositary]] to look after the fund’s interests, make sure it is properly managed, and to look after its assets. The depositary must be independent and must avoid [[conflict of interest|conflicts of interest]] with the fund, such as would arise if the [[depositary]] lent to or traded with the fund. A [[depositary]] typically cannot act as a prime broker (a bank who lends on margin to hedge funds). | ||
*Funds — particularly hedge funds and AIFs, but sometimes UCITS too — like to invest “on margin”, borrowing funds from a prime broker against the security of the assets it purchases with the margin loans. | *Funds — particularly hedge funds and AIFs, but sometimes UCITS too — like to invest “on margin”, borrowing funds from a prime broker against the security of the assets it purchases with the margin loans. | ||
*Prime | *[[Prime broker]]s like to have assets to it can use them, defray its funding costs and manage its balance sheet. | ||
*Structural problem therefore: Depositary is meant to hold the assets, but it can't lend against them. PB wants to lend against assets, but the depositary is meant to hold them. | *Structural problem therefore: [[Depositary]] is meant to hold the assets, but it can't lend against them. [[PB]] wants to lend against assets, but the [[depositary]] is meant to hold them. | ||
::''“Hold on,”'' says the PB. ''“If the [[depositary]] holds the assets, then I can hardly [[rehypothecate]] them, can I, and we know how important [[rehypothecation]] is to my business model, don’t we?”'' | ::''“Hold on,”'' says the PB. ''“If the [[depositary]] holds the assets, then I can hardly [[rehypothecate]] them, can I, and we know how important [[rehypothecation]] is to my business model, don’t we?”'' | ||
::The [[depositary]] shrugs. ''“So, I'll make you my [[sub-custodian]],”'' he says, ''“There: | ::The [[depositary]] shrugs. ''“So, I'll make you my [[sub-custodian]],”'' he says, ''“There: [[rehypothecate]] to your heart's content.”'' | ||
::''“No can do,”'' says the [[PB]]. ''“I can only rehypothecate against [[indebtedness]], and you don't owe me anything. Only the fund does. And besides, as a [[sub-custodian]] I only see an omnibus account. I don't know who owns what. For [[rehypo]] to work, I have to have a direct contractual relationship with the | ::''“No can do,”'' says the [[PB]]. ''“I can only rehypothecate against [[indebtedness]], and ''you'', dear depositary, don't owe me anything. Only the fund does. And besides, as a [[sub-custodian]] I only see an [[omnibus account]]. I don't know who owns what inside it. For [[rehypo]] to work, I have to have a direct contractual relationship with the fund. That's the deal.”'' | ||
*Answer: the [[depositary]] ''delegates'' the custody function to the [[prime broker]]. Both {{tag|AIFMD}}<ref>Art {{aifmdprov|21(11)}} AIFMD.</ref> and {{tag|UCITS}}<ref>Art {{ucits5prov|22a}} UCITS V.</ref> allow this in certain circumstances, but there are complicated rules as to whether the depositary can shift responsibility to the PB. | *Answer: the [[depositary]] ''delegates'' the custody function to the [[prime broker]]. Both {{tag|AIFMD}}<ref>Art {{aifmdprov|21(11)}} AIFMD.</ref> and {{tag|UCITS}}<ref>Art {{ucits5prov|22a}} UCITS V.</ref> allow this in certain circumstances, but there are complicated rules as to whether the depositary can shift responsibility to the PB. | ||
====Further reading==== | ====Further reading==== | ||
For delegation under AIFMD, proceed to Art. {{aifmdprov|21(11)}} AIFMD and take it from there. For UCITS, start with Art. {{ucits5prov|22a}} of UCITS V. | For delegation under AIFMD, proceed to Art. {{aifmdprov|21(11)}} AIFMD and take it from there. For UCITS, start with Art. {{ucits5prov|22a}} of UCITS V. |