Depositary's obligations re safekeeping of assets - AIFMD Provision
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AIFMD Anatomy™
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A fully authorised AIFM must appoint a single depositary for each AIF it manages. See Article 21.
Depositary’s Functions
The depositary may not be affiliated with the AIFM and must be domiciled in the same jurisdiction. Its main roles are:
- monitoring cashflows;
- providing safe-keeping of custodiable assets (i.e., being a custodian);
- verifying the AIF's ownership interest in non-custodiable assets;
- overseeing issue, and redemption of fund units;
- overseeing calculation and publication of NAVs;
- ensuring the AIF’s receives consideration for the sale of its assets within the usual time limits; and
- maintaining accurate records of the above.
Depositary’s liability
The depositary has almost - eek - strict liability for the performance of its functions: if it loses an AIF's custody assets, it must return identical financial instruments or the corresponding amount even if the instruments were lost by a sub-custodian. The depositary will not be liable for losses caused by force majeure which were unavoidable despite all reasonable efforts to the contrary.
However, there are strict rules which make this liability less extensive than it seems. Note especially insolvency of a sub-custodian is not covered.
Depositaries delegating to prime brokers
A prime broker to an AIF could be its depositary, but for a bunch of reasons would most likely not be (for one thing, the depositary has to be domiciled in the same jurisdiction and the AIF, and PBs tend to be domiciled in London, New York, Hong Kong etc, and not espievie jurisdictions; for another, there is an inherent conflict of interest between a depositary function and the margin lending relationship which is at the heart of what a PB does and how it makes money).
That said, depositaries can delegate custody tasks to prime brokers provided that they meet certain conditions.
Discharge of depositary's strict liability
Upon delegation the depositary remains strictly liable for loss caused by the sub-custodian. The depositary may discharge its liability if it can prove that:
- The delegation complies with the AIFMD;
- The sub-custodian has expressly accepted the depositary's liability so that the AIF may claim directly against the sub-custodian for the loss of financial instruments or for the depositary to make such a claim on their behalf; and
- The AIF expressly allows the depositary to discharge its liability in this way, establishing an objective reason for such a discharge.
Objective reason?
The objective reason must be established each time the depositary intends to discharge itself of liability, and must be:
- limited to precise and concrete circumstances; and
- consistent with the depositary's policies and decisions.
The following will be deemed to be objective reasons:
See also
- The depo-lite regime which is applicable only to Non-EU AIFs marketed on a private placement basis to professional investors (especially Article 36.
- Also, for giggles, compare FUND 3.11.21R of the Investment Funds sourcebook which is the UK implementation of the AIFMD directive:
FUND 3.11.21R, Investment Funds sourcebook
(1) A depositary must hold in custody all AIF custodial assets.
(2) The depositary must ensure that all AIF custodial assets that can be registered in a financial instruments account are registered in the depositary's books within segregated accounts opened in the name of the AIF, or the AIFM acting on behalf of the AIF, so that they can be clearly identified as belonging to the AIF at all times in accordance with the applicable law and CASS 6.1.16IA R (Depositaries of AIFs).