Depositary lite - AIFMD Provision

AIFMD Anatomy™ →Go uptown {{{2}}} In a Nutshell™ Section 36: 36(1). Member States may allow an authorised EU AIFM to market non-EU AIFs to professional investors, in their territory only as long as: (a) Depositary-lite: the AIFM complies with all of AIFMD except for having a depositary — though it must appoint someone to perform the following depositary functions: (i) Cashflows: monitor cashflows (art. 21(7)), (ii) Custody: hold assets in custody (art. 21(8)), and (iii) Subscriptions and redemptions: issue and cancel units and calculate NAV (art. 21(9)) and the AIFM may not do this itself. It must tell the regulator who it has appointed. (b) Regulatory cooperation: there must be suitable arrangements between regulators in the AIFM’s member state and the AIF's home regulator to exchange information and cooperate to monitor systemic risks; (c) No dodgy money-laundering types: the AIF’s home jurisdiction is not listed as a Non-Cooperative Country and Territory by FATF. 36(2). Member States may impose stricter rules on the AIFM on marketing of units non-EU AIFs to investors in their territory. 36(3). The Commission must adopt measures to cooperate with third countries. 36(4). ESMA must develop guidelines as to what counts as regulatory cooperation arrangements referred to in paragraph 1. view template Full text This is an unoffical transcription, may be wrong, buggered up, out of date etc. You should Google the original. Article 36 Conditions for the marketing in Member States without a passport of non-EU AIFs managed by an EU AIFM 36(1). Without prejudice to Article 35, Member States may allow an authorised EU AIFM to market to professional investors, in their territory only, units or shares of non-EU AIFs it manages and of EU feeder AIFs that do not fulfil the requirements referred to in the second subparagraph of Article 31(1), provided that: (a) the AIFM complies with all the requirements established in this Directive with the exception of Article 21. That AIFM shall however ensure that one or more entities are appointed to carry out the duties referred to in Article 21(7), 21(8) and 21(9). The AIFM shall not perform those functions. The AIFM shall provide its supervisory authorities with information about the identity of those entities responsible for carrying out the duties referred to in Article 21(7), 21(8) and 21(9); (b) appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards are in place between the competent authorities of the home Member State of the AIFM and the supervisory authorities of the third country where the non-EU AIF is established in order to ensure an efficient exchange of information that allows the competent authorities of the home Member State of the AIFM to carry out their duties in accordance with this Directive; (c) the third country where the non-EU AIF is established is not listed as a Non-Cooperative Country and Territory by FATF. 36(2). Member States may impose stricter rules on the AIFM in respect of the marketing of units or shares of non-EU AIFs to investors in their territory for the purpose of this Article. 36(3). The Commission shall adopt, by means of delegated acts in accordance with Article 56 and subject to the conditions of Articles 57 and 58, measures regarding the cooperation arrangements referred to in paragraph 1 in order to design a common framework to facilitate the establishment of those cooperation arrangements with third countries. 36(4). In order to ensure uniform application of this Article, ESMA shall develop guidelines to determine the conditions of application of the measures adopted by the Commission regarding the cooperation arrangements referred to in paragraph 1. view template 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.

Cut-down depositary function: Non-EU AIFs marketed by an EU AIFM to EU investors through private placement — call them Non-EU AIFs — have to comply with everything else in AIFMD but they don’t have to have a depositary.

But Non-EU AIFs do have to have someone to monitor cash flows, look after custody assets and manage subscriptions and redemptions of fund units, functions which are carried out by a depositary in a full-blown AIF. These three functions don’t have to be carried out by the same dude. An administrator might handle subscriptions and redemptions and cashflow monitoring, and a prime broker might handle the custody function.

Liability: Unlike in a full-blown depositary, a depo-lite does not have strict liability for loss of a Non-EU AIF’s assets.

For all these reasons this regime for Non-EU AIFs is referred to as “Depositary-Lite” or “Depo-Lite” regime.

Prime broker as depositary lite

A prime broker will be keen to act as custodian for a AIFMD, where it can get its grubby hands on all those lovely rehypothecatable custody assets, but it will not want to assume all liability — since it isn’t required to — so will accept this the role of custodian under 21(8)(a) as it applies to a person carrying out the safe-keeping function under Art. 36(1)(a).

Tedious, isn’t it.

In any case where the PB is a depo-lite custodian:

• There is no need for the usual delegation agreement transferring responsibility and liability from the AIFMD to the prime broker, because there isn’t a AIFMD - the AIFMD appoints PB directly to carry out the safe keeping;
• The PB won't want to sign an equivalent acceptance of all responsibility and liability directly to the AIFMD because it isn't obliged to, and why would you?

Does a margin-holder who receives collateral under a pledge count as a delegated custodian?

It is one thing for a prime broker, who definitely is safe-keeping for its client, to accept responsibilities as a AIFMD’s delegate (or, per the above, on a more limited basis as a depo-lite), but what about a futures clearing broker or a swap counterparty who receives margin under a pledge? It is hard to see why they would avoid the general drafting under AIFMD, but there are plenty of reasons it doesn’t make any sense. For one thing, a title transfer collateral arrangement, which is economically the same thing, wouldn’t be caught. Practically that may be the answer: just don’t take collateral under a pledge — or don't take non-cash collateral at all — but under the forthcoming Regulatory IM regime that might be difficult, right?

WE SHALL SEE.