Liability for loss of assets - AIFMD Provision

AIFMD Anatomy™ →Go uptown {{{2}}} In a Nutshell™ Section 21(12): 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. view template Full text This is an unoffical transcription, may be wrong, buggered up, out of date etc. You should Google the original. 21(12). The depositary shall be liable to the AIF or to the investors of the AIF, for the loss by the depositary or a third party to whom the custody of financial instruments held in custody in accordance with point (a) of paragraph 8 has been delegated. In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the AIF or the AIFM acting on behalf of the AIF without undue delay. The depositary shall not be liable if it can prove that the loss has arisen 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. The depositary shall also be liable to the AIF, or to the investors of the AIF, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to this Directive. 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.

A key part of the depositary’s responsibilty which it will be very keen to foist onto the prime broker who wishes to hold custody of the AIF’s financial instruments.

See also Article DR100 of the delegated regulation for even more detail.

“External event beyond its reasonable control”

So the unexpected insolvency of a delegate or subcustodian is an event beyond the depositary’s reasonable control, right? This was certainly the hopeful expectation of the European Bankiung Federation in its submissions to that effect of September 2013.

Wrong. According to ESMA’s final 500-page bunker-busting advice from 2011:

The depositary will not be liable for the loss of financial instruments held in custody by itself or by a subcustodian if it can demonstrate that all the following conditions are met:

1. The event which led to the loss is not a result of an act or omission of the depositary or one of its subcustodians to meet its obligations.

2. The event which led to the loss was beyond its reasonable control i.e. it could not have prevented its occurrence by reasonable efforts.

3. Despite rigorous and comprehensive due diligence, it could not have prevented the loss.

The omission of a subcustodian to meet its obligations — albeit through its insolvency (and associated failures in internal segregation etc) is thus not an “external event beyond the reasonable control” of the depositary.

See also

• Article DR100 of the delegated regulation