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21(1): Single depositary per AIF: AIFM must ensure each AIF has a single Depositary.
21(2): Written contract: Appointed by written contract meeting certain minimum criteria of AIFMD.
21(3): Eligibility criteria: a depositary must be
- (a) An authorised EU credit institution;
- (b) an EU investment firm meeting certain capital adequacy criteria;
- (c) an entity subject to prudential regulation that is deemed ok under 2009/65/EC (EUR Lex)
For Non-EU AIFs the depositary can be an equivalent credit institution or investment firm outside the EU (I think). There are also exceptions for illiquid AIFs that don't invest in custody assets.
21(4): Conflict management: To avoid conflicts between AIFM, AIF and investors:
- (a) AIFM can't be a depositary
- (b) a Prime Broker to an AIF can't be a depositary unless appropriate Chinese walls and conflict management processes are in place; however it may delegate of custody tasks as per 21(11) (and 21(8);
21(5): Jurisdiction: Depositary must be established in either:
- (a) home Member State of the AIF;
- (b) for non-EU AIFs, in the country of the AIF, the home Member State of the AIFM, or the Member State of reference of the AIFM (don't you just LOVE THIS GAME???!)
21(6): Additional criteria for non-EU AIFs: If established in a non-EU state per 21(5)(b), there are certain other conditions that must be met;
21(7) Depositary obligations re cash: The depositary must ensure that:
- AIF’s cashflows are properly monitored; and
- subscription payments are properly received and all cash booked in the depositary’s accounts at a suitable bank
21(8): Depositary's obligations re safekeeping of assets: AIF’s assets are entrusted to the depositary for safekeeping as follows:
- (a) Custody Assets: Depositary should hold in custody all assets that can be registered in its books or physically delivered to it; within segregated accounts in its books opened in the name of the AIF or AIFM
- (b) Non-custody assets: for non-custody assets there are some rules too.
21(9) Issuance and cancellation of fund units etc.: depositary must look after issue and cancellation of shares and units, calculation of NAVs and so on.
21(10) Standard of Conduct: Depositary must act honestly, fairly, professionally, independently and in the interest of the AIF and its investors and avoid conflicts of interest. The Depositary cannot reuse the AIF’s assets without its prior consent;
21(11). The depositary may delegate its paragraph 21(8) custody functions (but not its other functions), as long as:
- (a) it isn’t trying to avoid its AIFMD obligations;
- (b) it has an objective reason for doing so;
- (c) it has exercised all due skill, care and diligence in selecting its delegate, and must continuously monitors that third party;
- (d) it ensures the delegate meets the following conditions:
- (i) it is sophisticated enough to properly look after the AIF’s assets;
- (ii) it is effectively regulated, capitalised, supervised and audited to holds financial instruments in custody;
- (iii) it segregates the AIF’s assets from its own and from those of the depositary so they can be clearly identified as belonging to clients of the depositary;
- (iv) it does not use the assets without the AIF’s prior consent and prior notification to the depositary; and
- (v) it complies with paragraphs 21(8) and 21(10).
Where assets have to be held in a jurisdiction where no local entities are effectively regulated, capitalised, supervised and audited, the depositary may appoint a local entity which isn’t, but only as long as there are no local entities that satisfy the delegation requirements, and:
- (a) the depositary informs AIF investors must that such a delegation is required, and why, before they invest; and
- (b) the AIF instructs the depositary to delegate the custody of such financial instruments to such a local entity.
The third party may sub-delegate these functions, subject to the same requirements mutatis mutandis. Use of a securities settlement system does not count as delegation of custody functions.
21(12) Liability for loss of assets: the depositary is liable for the loss of assets by the depositary or a third party to whom custody has been delegated. In the case of such a loss the depositary shall return an identical financial instrument or the corresponding amount to the AIF without undue delay. It will not be liable if the loss arose 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.
21(13) Liability not affected by delegation except in certain circumstances: The depositary’s liability won’t be affected by any delegation under paragraph 21(11). However the depositary may discharge itself of liability if it can prove that:
- (a) all requirements for the delegation of its custody tasks set out in paragraph 21(11) are met;
- (b) a written contract between the depositary and the delegate sub-custodian expressly transfers the liability of the depositary to that delegate so that the AIF can claim directly against it; and
- (c) AIF expressly discharges the depositary’s liability under a written contract and establishes an “objective reason” for a discharge.
21(14) Discharge of liability for delegates in non-EU jurisdictions in limited circumstances: Discharge of liability in the case of third parties in Third Countries: when certain conditions met.
21(15) AIF Investors: Liability to AIF investors may be invoked directly or indirectly through the AIFM
21(16) Information: The depositary must make all information it receives in course of performing its duties available to its competent authorities, on request.
21(17) Certain other measures: The Commission shall adopt, by means of delegated acts in accordance with Article 56 and subject to the conditions of Articles 57 and 58, certain measures.
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