Delegation of depositary functions - UCITS V Provision
UCITS V Anatomy™
22a(3). The depositary may delegate safekeeping functions only where that delegate:
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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:
22a(4). For the purposes of this Article, the provision of services as specified by Directive 98/26/EC (EUR Lex) of the European Parliament and of the Council by securities settlement systems as designated for the purposes of that Directive or the provision of similar services by third-country securities settlement systems shall not be considered to be a delegation of custody functions.
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See also liability for delegation of safekeeping under Art 24 of UCITS V and the scintillating discussion of what counts as an “external event”
According to recital 15 of the level 2 delegated regulations under UCITS V (makes you weep, doesn't it) “when delegating safekeeping functions to a third party in accordance with Article 22a of 2009/65/EC (EUR Lex), the depositary is required to implement and apply an appropriate and documented procedure to ensure that the delegate complies with the requirements of Article 22a(3) of that Directive at all times. In order to ensure a sufficient level of protection of assets, it is necessary to set out certain principles that should be applied in relation to the delegation of safekeeping functions.”
Custody delegation under UCITS and AIFMD looks kind of similar doesn’t it?
Yes, it does. The textual differences betwixt UCITS (Art 22a) and AIFMD (Art 21(11)) are largely formal, or mutatis mutandis in style. The substantive differences are that a UCITS depositary:
- cannot reuse the UCITS’ assets at all, whereas an AIFMD depositary can, with prior notification and consent;
- must take all necessary steps to ensure UCITS’ assets aren’t caught up in the bankruptcy estate of an insolvent delegate custodian — there isn’t an equivalent provision under AIFMD, though perhaps you might imply it;
- must notify UCITS investors of the risks of delegation where a non-EEA jurisdiction requires use of a local custodian and no local entities satisfy the delegation requirements and not just the fact of, and circumstances justifying, it.
===Article 13 level 2 delegated regulations under UCITS V ===
Safekeeping duties with regard to assets held in custody
1. A depositary shall be deemed to comply with the requirements set out in point (a) of Article 22(5) of 2009/65/EC (EUR Lex) with respect to financial instruments to be held in custody where it ensures that:
- (a) the financial instruments are properly registered in accordance with Article 22(5)(a)(ii) of 2009/65/EC (EUR Lex);
- (b) records and segregated accounts are maintained in a way that ensures their accuracy, and in particular record the correspondence with the financial instruments and cash held for UCITS;
- (c) reconciliations are conducted on a regular basis between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated in accordance with Article 22a of 2009/65/EC (EUR Lex);
- (d) due care is exercised in relation to the financial instruments held in custody in order to ensure a high standard of investor protection;
- (e) all relevant custody risks throughout the custody chain are assessed and monitored and the management company or the investment company is informed of any material risk identified;
- (f) adequate organisational arrangements are introduced to minimise the risk of loss or diminution of the financial instruments, or of rights in connection with those financial instruments as a result of fraud, poor administration, inadequate registering or negligence;
- (g) the UCITS’s ownership right or the ownership right of the management company acting on behalf of the UCITS over the assets is verified.
2. Where a depositary has delegated its safekeeping functions, with regard to assets held in custody, to a third party in accordance with Article 22a of 2009/65/EC (EUR Lex), it shall remain subject to the requirements of points (b) to (e) of paragraph 1 of this Article. The depositary shall also ensure that the third party complies with the requirements of points (b) to (g) of paragraph 1 of this Article.
The carve out for local regulations
Is a lot narrower than it would seem to be, and seems on its face to preclude delegating to a local custodian in a jurisdiction where there is no market practice to fully segregate custodian assets from client assets. Perhaps the EU boxwallahs thought such a jurisdiction was too inherently dangerous for UCITS funds to invest in at all. but at any rate the carve-out literally only applies to the lack of effective prudential regulation and capitalisation, rather than the wider segregation criteria:
- Notwithstanding point (b)(i) [i.e., prudent regulation and capitalisation] 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 [i.e., prudent regulation and capitalisation] ...
See also
- ↑ Does this leave the door open for omnibus segregation of different funds managed by the same depositary?