Liability for delegation - UCITS V Provision

UCITS V Anatomy™ →Go uptown In a Nutshell™ Clause 24: Article 24 24(1). The depositary will be liable to the UCITS if it (or a third party delegated under Article 22(5)(a)) loses custody assets it is meant to be safekeeping. If it loses an asset the depositary must promptly return a fungible financial instrument in the same nominal amount. The depositary will not be liable if the loss arose through a force majeure which it could not have avoided having taken all reasonable efforts to do so. The depositary will also be liable to the UCITS for all other losses they suffer through the depositary’s negligent or wilful failure to fulfil its obligations under UCITS. 24(2). The depositary cannot discharge its liability if it delegates in accordance with Article 22a. 24(3). The depositary cannot exclude or limit its liability to the UCITS by contract. 24(4). If it tries to, the contract will be void. 24(5). UCITS investors can sue the depositary directly or indirectly through the UCITS management company as long as it does not create duplication or unequal treatment of the investors. view template UCITS V full text of Clause 24: Article 24 24(1). Member States shall ensure that the depositary is liable to the UCITS and to the unit-holders of the UCITS for the loss by the depositary or a third party to whom the custody of financial instruments held in custody in accordance with point (a) of Article 22(5) has been delegated. In the case of a loss of a financial instrument held in custody, Member States shall ensure that the depositary returns a financial instrument of an identical type or the corresponding amount to the UCITS or the management company acting on behalf of the UCITS without undue delay. The depositary shall not be liable if it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. Member States shall ensure that the depositary is also liable to the UCITS, and to the investors of the UCITS, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to this Directive. 24(2). The liability of the depositary referred to in paragraph 1 shall not be affected by any delegation as referred to in Article 22a. 24(3). The liability of the depositary referred to in paragraph 1 shall not be excluded or limited by agreement. 24(4). Any agreement that contravenes paragraph 3 shall be void. 24(5). Unit-holders in the UCITS may invoke the liability of the depositary directly or indirectly through the management company or the investment company provided that this does not lead to a duplication of redress or to unequal treatment of the unit-holders. 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.

Comare with Art 21(12) of AIFMD.
Not pretty, if you are a depositary, and that means not pretty if you are a delegate either. Since the depostiary can't discharge its responsibility for looking after assets by delegating that to a prime broker or other subcustodian, prome brokers should expect to be asked to provide eye-watering indemnities to the depositaries by whom they are delegated the custody function.

Seeing as a prime broker can’t generally rehypothecate UCITS assets, it kind of makes you wonder why a prime broker would want to hold the assets in the first place.

Careful

Note that the prohibition on excluding or limiting liability for delegated obligations under UCITS Art 24(2) is limited specifically to those functions it has delegated under Art 22a - so when giving your indemnities and so on, be assiduous not to indemnify liabilities wider than those covered by Art 22a that the depositary could, if it wanted to, contract out of.

Recital 27:

Where the depositary delegates custody tasks and the financial instruments held in custody by a third party are lost, the depositary should be liable. In the case of loss of an instrument held in custody, a depositary should return a financial instrument of an identical type or the corresponding amount, even if the loss occurred with a third party to which the custody has been delegated. The depositary should be discharged of that liability only where it is able to prove that the loss resulted from an external event beyond its reasonable control and with consequences that were unavoidable despite all reasonable efforts to the contrary. In that context, a depositary should not be able to rely on internal situations such as a fraudulent act by an employee to discharge itself of liability. No discharge of liability, be it regulatory or contractual, should be possible in the case of loss of assets by the depositary or a third party to which the custody has been delegated.

See also

• Art 21(12) of AIFMD
• Delegation under AIFMD.