Depositary

AIFMD Anatomy™ →Go uptown 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) | 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.

UCITS Anatomy™ →Go uptown 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.
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. ===UCITS=== The key section of UCITS V is Article Template:Ucitsprov.

See also

• Depositary - AIFMD
• Depositary - UCITS