Depositary's obligations re safekeeping of assets - AIFMD Provision

A fully authorised AIFM must appoint a single depositary for each AIF it manages. See Article 21.

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.

Delegation

You will see the depositary role is not really suitable for a prime broker. the depositary may delegate some of these functions however: A prime broker may act as:

custodian, but will have certain conditions to that appointment;
"Depositary lite" to certain non-EU domiciled AIFs

Depositary can only delegate in certain circumstances:

It must have an "objective reason".
it must exercise due skill, care and diligence in the selection, appointment and ongoing monitoring of the sub-custodian;
sub-custodian must:
- have structures and expertise proportionate to the nature, scale and complexity of the assets of the AIF
- be subject, in acting as a custodian, to effective prudential regulation and supervision in its local jurisdiction and periodic external audits;
- segregate AIF assets from its own and the depositary's assets
- reuse the AIF’s assets without the AIF's express consent.

Liability

The {{aifmdprov|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 casued by force majeure which were unavoidable despite all reasonable efforts to the contrary. However there are strict rules which make it less extensive than it seems. Note especially insolvency of a sub-custodian is not covered.

Paragraph 21(8), AIFMD

AIFMD, 21(8)
21(8). The assets of the AIF or the AIFM acting on behalf of the AIF shall be entrusted to the depositary for safe-keeping, as follows:

(a) for financial instruments that can be held in custody:

(i) the depositary shall hold in custody all financial instruments that can be registered in a financial instruments account opened in the depositary’s books and all financial instruments that can be physically delivered to the depositary;

(ii) for that purpose, the depositary shall ensure that all those financial instruments that can be registered in a financial instruments account opened in the depositary’s books are registered in the depositary’s books within segregated accounts in accordance with the principles set out in Article 16 of Directive 2006/73/EC (EUR Lex) (AIFMD), 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 in accordance with the applicable law at all times;

(b) for other assets:

(i) the depositary shall verify the ownership of the AIF or the AIFM acting on behalf of the AIF of such assets and shall maintain a record of those assets for which it is satisfied that the AIF or the AIFM acting on behalf of the AIF holds the ownership of such assets;

(ii) the assessment whether the AIF or the AIFM acting on behalf of the AIF holds the ownership shall be based on information or documents provided by the AIF or the AIFM and, where available, on external evidence;

(iii) the depositary shall keep its record up-to-date.

(view template)

21(8) in a Nutshell™ _{(AIFMD edition)}

21(8): Depositary's obligations re safekeeping of assets: AIF’s assets are entrusted to the depositary for safekeeping as follows:

(a) Custody Assets: Depositary should hold in custody all assets that can be registered in its books or physically delivered to it; within segregated accounts in its books opened in the name of the AIF or AIFM

(b) Non-custody assets: for non-custody assets there are some rules too.

view template

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

FUND 3.11.21R

(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).