Delegation of depositary’s functions - AIFMD Provision: Difference between revisions

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-{{aifmdanat|21(11)|}}{{aifmddepositarydelegation}}
+{{aifmdanat|21(11)|}}On what on earth this is all about.
+[[AIFMD]], requires an [[AIF]] to appoint a [[depositary - AIFMD Provision|depositary]] to perform certain administrative functions: managing cashflows, supervising subscriptions and redemptions, and [[custody]] of the AIF’s assets labelled “safekeeping” in the argot of European Regulation. The depositary cannot have any financial transactions or other conflicts of interest with the fund and must be organised in the fund’s home jurisdiction. Therefore a prime broker cannot be an [[AIF]] [[depositary]]: it is (usually) not incorporated in the right jurisdiction, and in any case is definitely involved in financial transactions with the [[AIF]]. That’s what it is there for.
+Now a big part of a [[prime broker]]’s business is [[margin lending]], which depends on the prime broker having not only custody but rights of reuse over the AIF’s assets. What to do? Well, [[AIFMD]] allows a depositary to ''[[delegate]]'' its custody/safekeeping function (but ''only'' that function) to a third party ''where there are [[objective reason]]s for it doing so''. There is more commentary [[Objective reason - AIFMD Provision|elsewhere]], but take it as read that “because the PB need to hold assets for [[margin lending]], [[reuse]], [[security]] and so on” ''does'' count as an objective reason.
+Right. So [[AIFMD]] says a depositary may (with an [[Objective reason - AIFMD Provision|objective reason]]) delegate that responsibility to a third party and may even (with another [[Objective reason - AIFMD Provision|objective reason]]) ''discharge'' its liability for safekeeping by transferring it to its delegate: see Article [[21(13) - AIFMD Provision|21(13)]]: the depositary can only discharge its liability where
+(i) it was entitled to delegate responsibility per [[21(11)(d) - AIFMD Provision|21(11)]]
+(ii) there is an express written transfer of liability to the delegate, so the AIF can claim directly against it, and
+(iii) the AIF expressly discharges the [[Depositary - AIFMD Provision|depositary]]’s liability under a written contract and there is an [[objective reason]] for doing so.
+==== Risk to depositary ====
+The risk to the depositary is:
+(i) That its delegation of the custody function is not permitted; or
+(ii) It ''is'' permitted, but that having delegated, it is held responsible under AIFMD for the loss of assets by its delegate, for some reason (i.e., that its purported discharge of liability is invalid)
+Therefore:
+==== Depositary’s objectives ====
+What the depositary needs to achieve is in its inter-contractual relations:
+(i) Actually delegating custody function to the prime broker (and establishing a valid “[[Objective reason - AIFMD Provision|objective reason]]” for doing so).<ref>This is tried, true and not controversial: [[AIF]] [[Depositary - AIFMD Provision|depositaries]] delegate safekeeping to [[Prime broker|PB]]<nowiki/>s all the time. </ref>
+(ii) Transferring its liability for safekeeping losses to the prime broker so that the [[Alternative investment fund|AIF]] has a direct claim against the delegate [[prime broker]];
+(iii) Expressly discharging its liability to the AIF for delegated safekeeping to the AIF (and establishing a valid [[Objective reason - AIFMD Provision|objective reason]] for doing so).
+(iv) In case the [[Depositary - AIFMD Provision|depositary]]’s intended discharge of liability does not work, being indemnified by the prime broker for liabilities the depositary incurs ''directly to the AIF'' as a result of safekeeping losses incurred by the prime broker (or its sub-custody network).
+==== Prime broker’s objectives ====
+The prime broker wants to achieve the following:
+(i) A direct custody relationship with the AIF, on its regular terms, so that it can finance the AIF’s assets, reuse them, and take security over them.
+(ii) It wants to hold the [[Depositary - AIFMD Provision|depositary]] [[Hold harmless|harmless]] against only the direct liabilities it suffers as a result of the [[prime broker]]’s mis-performance of the delegated custody function by [[AIFMD]]. It does ''not'' want to underwrite other liabilities (e.g. contractual ones) that the [[Depositary - AIFMD Provision|depositary]] may have volunteered to the AIF, and ''nor does it want to agree to the depositary’s own custody terms''.
+{{aifmddepositarydelegation}}
 {{Ucits delegaton versus aifmd delegation}}
 {{sa}}