Depositary - UCITS V Provision

UCITS V Anatomy™ →Go uptown In a Nutshell™ Clause 22(3): Template:Nutshell UCITS V 22(3) view template UCITS V full text of Clause 22(3): 22(3). The depositary shall: (a) ensure that the sale, issue, repurchase, redemption and cancellation of units of the UCITS are carried out in accordance with the applicable national law and the fund rules or instruments of incorporation; (b) ensure that the value of the units of the UCITS is calculated in accordance with the applicable national law and the fund rules or the instruments of incorporation; (c) carry out the instructions of the management company or an investment company, unless they conflict with the applicable national law, or with the fund rules or the instruments of incorporation; (d) ensure that in transactions involving the assets of the UCITS any consideration is remitted to the UCITS within the usual time limits; (e) ensure that the income of the UCITS is applied in accordance with the applicable national law and the fund rules or the instruments of incorporation. view template Resources: UCITS IV (2009/65/EC (EUR Lex)) | UCITS V (2014/91/EU (EUR Lex)) | ESMA Guidance on UCITS | Depositary comparison under AIFMD and UCITS Navigation - UCITS IV: 50(1)(g) Financial derivative instruments Navigation - UCITS V: 22(2) Written contract with depositary | 22(3) (subscriptions, redemptions, valuation by depositary) | 22(4) (cash monitoring | 22(5) (safekeeping by depositary) | 22(7) (no reuse of assets by depositary) | 22a (delegation of depositary functions) Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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:

• monitor the AIF’s cashflows
• oversee subscriptions and redemptions
• oversee the calculation of NAV
• hold custody assets in safekeeping

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, 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.

Article 22(3) notes the depositary’s general duties.

Quoth the UCITS Directive 2014/91/EU (EUR Lex):

(12) A UCITS should appoint a single depositary having general oversight over the assets of the UCITS. Requiring that there be a single depositary should ensure that the depositary has an overview of all the assets of the UCITS and both fund managers and investors have a single point of reference in the event that problems occur in relation to the safekeeping of assets or the performance of oversight functions. The safekeeping of assets includes holding assets in custody or, where assets are of such a nature that they cannot be held in custody, verification of the ownership of those assets as well as record-keeping for those assets.

(13) In performing its tasks, a depositary should act honestly, fairly, professionally, independently and in the interest of the UCITS and of the investors of the UCITS.

[...]

(20) It is necessary to lay down the conditions for the delegation of the depositary’s safekeeping duties to a third party. Delegation and sub-delegation should be objectively justified and subject to strict requirements in relation to the suitability of the third party entrusted with the delegated function, and in relation to the due skill, care and diligence that the depositary should employ to select, appoint and review that third party. For the purpose of achieving uniform market conditions and an equally high level of investor protection, such conditions should be aligned with those applicable under Directive 2011/61/EU (EUR Lex). Provisions should be adopted to ensure that third parties to which safekeeping functions have been delegated have the necessary means to perform their duties and that they segregate the assets of the UCITS.

See also

• Depositary in the context of AIFMD.
• The important parts relating to delegation are set out in Article 22a.

Comparison of UCITS and AIFMD Depositary Regimes

The difference in liability for depositaries between AIFMD and UCITS is that
(i) liability can't be contractually excluded under UCITS V, and
(ii) UCITS V prospectuses must contain a description of any safekeeping arrangements delegated, identification of the delegate, and any conflict of interest that may arise.

Depositary eligibility criteria:

• UCITS V: Significantly more detailed requirements than UCITS IV
• AIFMD: Less detailed requirements than UCITS V.

Liability:

• UCITS V: Significantly more detailed requirements than UCITS IV
• AIFMD: Similar to UCITS V, except it is possible to contractually transfer liability to a delegate in certain circumstances

Written contract with depositary required:

• UCITS V: More detailed requirements than UCITS IV
• AIFMD: Similar requirement to UCITS V

Oversight functions:

• UCITS V: Broadly similar to UCITS IV: Additional requirement for oversight function to be carried out in accordance with applicable national law and the fund rules or the instruments of incorporation. This now applies to investment companies and management companies.
• AIFMD: Similar requirement to UCITS V.

Cash monitoring functions:

• UCITS V: New to UCITS V Depositary must monitor cash flows and ensure cash booked to the correct cash account
• AIFMD: Similar requirement to UCITS V

Safekeeping functions:

• UCITS V: (Article 22(5)) Significantly more detailed requirements than UCITS IV: Assets to be entrusted to the depositary for safekeeping. Different requirements for financial instruments capable of being held in custody and "other assets".
• AIFMD: Similar requirement to UCITS V: UCITS V has additional requirement to provide regular inventories of UCITS assets held

Use of UCITS assets:

• UCITS V:New to UCITS V: Re-use of UCITS assets by the depositary or its delegate prohibited. Re-use of UCITS assets for the benefit of the UCITS is permitted subject to conditions
• AIFMD: Less stringent requirements than UCITS V: Re-use is permitted with prior consent

Insolvency of a depositary:

• UCITS V: New to UCITS V: Member states to ensure that UCITS assets held in custody are not available to general creditors on the insolvency of the depositary or its delegate if they are located in the EU
• AIFMD: No similar requirement in AIFMD

Delegation:

• UCITS V: New to UCITS V (Article 22a): Delegation of oversight and cash monitoring prohibited. Delegation of safekeeping functions permitted under certain conditions
• AIFMD: Similar requirement to UCITS V: UCITS V has additional requirement that depositary takes ‘all reasonable steps’ to ensure that UCITS assets are not available to general creditors of the delegate upon insolvency

Sub-delegation:

• UCITS V: New to UCITS V
• AIFMD: Permitted under the same conditions as delegation Similar requirement to UCITS V

Central Securities Depositaries:

• UCITS V: New to UCITS V: The provision of settlement services by a CSD is not delegation of custody. Entrusting custody to a CSD or third country CSD is delegation
• AIFMD: Similar requirement to UCITS V in respect of settlement services

Location of the depositary:

• UCITS V: Same as UCITS IV: A depositary must have its registered office or be established in the home state of the UCITS
• AIFMD: Similar requirement to UCITS V for EU AIFs

Dual functions and avoiding conflicts of interest:

• UCITS V: More detailed requirements than UCITS IV: No management company or investment company shall also act as depositary; duty to act honestly and in interest of the UCITS and avoid conflicts of interest
• AIFMD: Similar requirement to UCITS V

Replacement of the depositary:

• UCITS V: Same requirements as UCITS IV
• AIFMD: No similar requirement under AIFMD

Provision of information to competent authorities:

• UCITS V: New to UCITS V
• AIFMD: Similar requirement to UCITS V