Depositary - AIFMD Provision

AIFMD Anatomy™ →Go uptown {{{2}}} In a Nutshell™ Section 21: 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. view template Full text This is an unoffical transcription, may be wrong, buggered up, out of date etc. You should Google the original. 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.

See also depositary lite

The person appointed by an AIF to handle subscriptions and redemptions, monitor cashflows, look after the AIF’s assets — all that kind of thing. The key parts of AIFMD insofar as they relate to depositary are:

• 21(4) - avoiding conflicts of interest
  
• 21(5) - location of depositary
  
• 21(6) - conditions to appointment of depositary in a third country
  
• 21(7) - general responsibilities of depositary
  
• 21(11) - criteria for delegating depositary functions to third parties
  
• 21(12) - Liability for loss of assets
  
• 21(13) - Liability not affected by delegation except in certain circumstances
  
• 21(14) - further provisions for where third party is in a third country
  

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.

See also

• Depositary lite