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Now a big part of a [[prime broker]]’s business is [[margin lending]], which depends on the prime broker having not only custody but rights of reuse over the AIF’s assets. What to do? Well, [[AIFMD]] allows a depositary to ''[[delegate]]'' its custody/safekeeping function (but ''only'' that function) to a third party ''where there are [[objective reason]]s for it doing so''. There is more commentary [[Objective reason - AIFMD Provision|elsewhere]], but take it as read that “because the PB need to hold assets for [[margin lending]], [[reuse]], [[security]] and so on” ''does'' count as an objective reason. | Now a big part of a [[prime broker]]’s business is [[margin lending]], which depends on the prime broker having not only custody but rights of reuse over the AIF’s assets. What to do? Well, [[AIFMD]] allows a depositary to ''[[delegate]]'' its custody/safekeeping function (but ''only'' that function) to a third party ''where there are [[objective reason]]s for it doing so''. There is more commentary [[Objective reason - AIFMD Provision|elsewhere]], but take it as read that “because the PB need to hold assets for [[margin lending]], [[reuse]], [[security]] and so on” ''does'' count as an objective reason. | ||
Right. So AIFMD says a depositary may (with | Right. So [[AIFMD]] says a depositary may (with an [[Objective reason - AIFMD Provision|objective reason]]) delegate that responsibility to a third party and may even (with another [[Objective reason - AIFMD Provision|objective reason]]) ''discharge'' its liability for safekeeping by transferring it to its delegate: see Article [[21(13) - AIFMD Provision|21(13)]]: the depositary can only discharge its liability where | ||
(i) it was entitled to delegate responsibility per [[21(11)(d) - AIFMD Provision|21(11)]] | |||
Therefore | (ii) there is an express written transfer of liability to the delegate, so the AIF can claim directly against it, and | ||
(iii) the AIF expressly discharges the [[Depositary - AIFMD Provision|depositary]]’s liability under a written contract and there is an [[objective reason]] for doing so. | |||
==== Risk to depositary ==== | |||
The risk to the depositary is: | |||
(i) That its delegation of the custody function is not permitted; or | |||
(ii) It ''is'' permitted, but that having delegated, it is held responsible under AIFMD for the loss of assets by its delegate, for some reason (i.e., that its purported discharge of liability is invalid) | |||
Therefore: | |||
==== Depositary’s objectives ==== | |||
What the depositary needs to achieve is in its inter-contractual relations: | |||
(i) Actually delegating custody function to the prime broker (and establishing a valid “[[Objective reason - AIFMD Provision|objective reason]]” for doing so).<ref>This is tried, true and not controversial: [[AIF]] [[Depositary - AIFMD Provision|depositaries]] delegate safekeeping to [[Prime broker|PB]]<nowiki/>s all the time. </ref> | |||
(ii) Transferring its liability for safekeeping losses to the prime broker so that the [[Alternative investment fund|AIF]] has a direct claim against the delegate [[prime broker]]; | |||
(iii) Expressly discharging its liability to the AIF for delegated safekeeping to the AIF (and establishing a valid [[Objective reason - AIFMD Provision|objective reason]] for doing so). | |||
(iv) In case the [[Depositary - AIFMD Provision|depositary]]’s intended discharge of liability does not work, being indemnified by the prime broker for liabilities the depositary incurs ''directly to the AIF'' as a result of safekeeping losses incurred by the prime broker (or its sub-custody network). | |||
==== Prime broker’s objectives ==== | |||
The prime broker wants to achieve the following: | |||
(i) A direct custody relationship with the AIF, on its regular terms, so that it can finance the AIF’s assets, reuse them, and take security over them. | |||
(ii) It wants to hold the [[Depositary - AIFMD Provision|depositary]] [[Hold harmless|harmless]] against only the direct liabilities it suffers as a result of the [[prime broker]]’s mis-performance of the delegated custody function by [[AIFMD]]. It does ''not'' want to underwrite other liabilities (e.g. contractual ones) that the [[Depositary - AIFMD Provision|depositary]] may have volunteered to the AIF, and ''nor does it want to agree to the depositary’s own custody terms''. | |||
{{aifmddepositarydelegation}} | {{aifmddepositarydelegation}} |