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In a Nutshell™ Clause 22(5):
22(5). The depositary must hold the UCITS’ assets in safekeeping as follows:
- (a) “custodiable” financial instruments:
- (i) hold in them custody (whether in registered form of physically delivered);
- (ii) register all registrable financial instruments in segregated accounts in the depositary’s books so it is clear they belong to the UCITS;
- (b) other assets:
- (i) verify the UCITS’s ownership of the assets based on information provided by the UCITS and any other available evidence;
- (ii) keep an up-to-date record of those assets which it is satisfied that the UCITS owns.
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UCITS V full text of Clause 22(5):
22(5). The assets of the UCITS shall be entrusted to the depositary for safekeeping as follows:
- (a) for financial instruments that may be held in custody, the depositary shall:
- (i) hold in custody all financial instruments that may be registered in a financial instruments account opened in the depositary’s books and all financial instruments that can be physically delivered to the depositary;
- (ii) ensure that all financial instruments that can be registered in a financial instruments account opened in the depositary’s books are registered in the depositary’s books within segregated accounts in accordance with the principles set out in Article 16 of Directive 2006/73/EC (EUR Lex), opened in the name of the UCITS or the management company acting on behalf of the UCITS, so that they can be clearly identified as belonging to the UCITS in accordance with the applicable law at all times;
- (b) for other assets, the depositary shall:
- (i) verify the ownership by the UCITS, or by the management company acting on behalf of the UCITS, of such assets by assessing whether the UCITS or the management company acting on behalf of the UCITS holds the ownership based on information or documents provided by the UCITS or by the management company and, where available, on external evidence;
- (ii) maintain a record of those assets for which it is satisfied that the UCITS or the management company acting on behalf of the UCITS holds the ownership and keep that record up to date.
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In a Nutshell™ Clause 22a(3):
22a(3). The depositary may delegate safekeeping functions only where that delegate:
- (a) is competent to look after the assets of the UCITS given to it;
- (b) where it holds custodiable assets, the delegate is properly prudentially regulated in its it its own jurisdiction and regularly audited on its custody holdings;
- (c) effectively segregates the UCITS assets from its own assets and those of the depositary so they can be clearly identified as belonging to clients of the depositary[1];
- (d) takes steps to ensure that if it is insolvent, the UCITS’s assets that it holds are isolated from its creditors; and
- (e) complies generally with Articles 22(2), 22(5), 22(7) and 25.
- Where local rules require financial instruments to be held by a local custodian and none are effectively regulated or audited, the depositary may delegate to a non-compliant local custodian only as far as is required by those local rules, and only as long as there are no compliant local custodians, and only where:
- (a) the UCITS investors are informed of these circumstances and the associated risks before they invest;
- (b) the UCITS management company has instructed the depositary to make the delegation.
- The delegate may sub-delegate on the same terms. In such a case, Article 24(2) shall apply mutatis mutandis to the relevant parties.
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UCITS V full text of Clause 22a(3):
22a(3). The functions referred to in Article 22(5) may be delegated by the depositary to a third party only where that third party at all times during the performance of the tasks delegated to it:
- (a) has structures and expertise that are adequate and proportionate to the nature and complexity of the assets of the UCITS or the management company acting on behalf of the UCITS which have been entrusted to it;
- (b) for custody tasks referred to in point (a) of Article 22(5), is subject to:
- (i) effective prudential regulation, including minimum capital requirements, and supervision in the jurisdiction concerned;
- (ii) an external periodic audit to ensure that the financial instruments are in its possession;
- (c) segregates the assets of the clients of the depositary from its own assets and from the assets of the depositary in such a way that they can, at any time, be clearly identified as belonging to clients of a particular depositary;
- (d) takes all necessary steps to ensure that in the event of insolvency of the third party, assets of a UCITS held by the third party in custody are unavailable for distribution among, or realisation for the benefit of, creditors of the third party; and
- (e) complies with the general obligations and prohibitions laid down in Article 22(2), 22(5) and 22(7) and in Article 25.
- Notwithstanding point (b)(i) of the first subparagraph, where the law of a third country requires that certain financial instruments be held in custody by a local entity and no local entities satisfy the delegation requirements laid down in that point, the depositary may delegate its functions to such a local entity only to the extent required by the law of that third country, only for as long as there are no local entities that satisfy the delegation requirements, and only where:
- (a) the investors of the relevant UCITS are duly informed, prior to their investment, of the fact that such a delegation is required due to legal constraints in the law of the third country, of the circumstances justifying the delegation and of the risks involved in such a delegation;
- (b) the investment company, or the management company on behalf of the UCITS, has instructed the depositary to delegate the custody of such financial instruments to such a local entity.
- The third party may, in turn, sub-delegate those functions, subject to the same requirements. In such a case, Article 24(2) shall apply mutatis mutandis to the relevant parties.
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Note the depositary may delegate this function to a third party only in limited circumstances, one of which being no right of reuse: See 22a(3):
- ↑ Does this leave the door open for omnibus segregation of different funds managed by the same depositary?