Sub-custodian

A topic of some recent interest in light of AIFMD and UCITS V legislation. Under both regimes a single depository must be appointed having strict liability for the safe keeping of assets. In particular:

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: 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: 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