Safekeeping duties with regard to assets held in custody - AIFMD Provision

AIFMD Anatomy™ Go Premium {{{2}}} In a Nutshell™ Section DR89: Art. DR89 Safekeeping duties with regard to assets held in custody DR89(1). To comply with the obligations in Art. 21(8)(a) of AIFMD with respect to financial instruments to be held in custody, a depositary must at least ensure that someone: (a) properly registers the financial instruments per Art. 21(8)(a)(ii); (b) accurately maintains accounts to record the financial instruments and cash held for AIFMs; (c) regularly reconciles the depositary’s own records with sub-custodian it appoints per Art. 21(11); (d) takes due care over custody financial instruments to ensure a high standard of investor protection; (e) assesses and monitors all risks throughout the custody chain and inform the AIFM of material ones; (f) minimises the risk of loss of or diminution to financial instruments through fraud or negligence; (g) verifies the AIF’s ownership right over the assets. DR89(2). A depositary who delegates custody functions under Art. 21(11) of AIFMD is still subject to DR89(1)(b) to (e) and must ensure that the third party complies with Art. DR89(1)(b) to (g) and the segregation obligations in Art. DR99. DR89(3). A depositary’s safe-keeping duties in Art. DR89(1) and DR89(2) apply on a look-through basis to underlying assets held by financial or legal structures controlled directly or indirectly by the AIF or its AIFM. Art.DR89(1) will not apply to fund of funds structures or master-feeder structures where the underlying funds have their own depositary who is responsible for custody of their assets. view template Full text This is an unoffical transcription, may be wrong, buggered up, out of date etc.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) | Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

• Breaking - this is due to be replaced in 2020 with the upshot of Commission Delegated Regulation (EU) 2018/1618 amending Delegated Regulation (EU) 231/2013

Note the lookthrough provisions of Article DR89(3). If an AIF is set up as a feeder into another fund controlled by the AIFM, such that the primary investments of the AIF are held in a different legal entity, the Depositary’s safe keeping obligations apply to the assets held in that ultimate legal entity. In otherwords, an AIF can't craftily get around AIFMD Depositary safekeeping responsibilities by sticking its investment portfolio in a ten dollar offshore espievie.

This stands to reason, but it can lead to complexity: If the AIF feeds into a fund alongside other offshore feeders that aren’t AIFMD regulated then the depositary’s obligations, strictly speaking, apply to the extent of any assets in the master fund attributable to the AIF. Of course, if they’re held, as you would expect them to be, in a single account in the master, that's not really practicable, but no Depositary will want to be liable for assets it doesn’t have to be responsible for, so expect efforts to run segregated accounts inside the master fund. daily rebalancing of the segregated portfolios will become quite a trick, for no good reason.

Note: the obligations that apply are not the actual safekeeping ones of 21(8) — that unregulated fund may well have its own custodian, and may accept subscriptions from non-AIF feeders and other investors who do not require it to have a depositary — but of responsibility under the Delegated Regulation. So you have to accept responsibility for whichever schmuck the master fund appointed, and keep it honest.

See also

• AIFMD Art. 21(8) — Depositary’s safe-keeping function
• Delegation of safekeeping function under Art. 21(11)