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Depositary lite - AIFMD Provision: Difference between revisions

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Non-{{tag|EU}} [[AIF]]s marketed by an {{tag|EU}} [[AIFM]] to EU investors through [[private placement]] are subject to certain somewhat diminished depositary requirements (Article {{aifmdprov|36}} {{tag|AIFMD}}). Unlike Article {{aifmdprov|21}} (which covers the full depositary obligations of an {{aifmdprov|EU AIFM}}/{{aifmdprov|EU AIF}}) there is no strict liability for loss of assets for a {{aifmdprov|non-EU AIF}}, and no requirement to appoint a single {{aifmdprov|depositary}} - therefore this regime is referred to as "{{aifmdprov|Depositary-Lite}}" or "{{aifmdprov|Depo-Lite}}".
{{aifmdanat|36|
[[File:Texas book depository.png|450px|frameless|center]]
}}For EU AIFMs that market non-EU AIFs to professional investors in the EU, AIFMD does away with the need for the fund to have a full-blown [[Depositary - AIFMD Provision|depositary]], but you do need to monitor cash flows, look after [[custody]] assets and manage [[subscription|subscriptions]] and [[redemption|redemptions]].  


An AIFM must ensure one or more entities are appointed to carry out the following duties of '''cash flow monitoring''', '''safe-keeping''' and '''oversight'''
These three functions don’t have to be carried out by the same dude. An administrator might handle [[subscription]]s and [[redemption]]s and cashflow monitoring, and a [[prime broker]] might handle the [[custody]] function. When a prime broker does this, we call this a “depositary lite”, or “depo-lite” function. Unlike a full-blown {{aifmdprov|depositary}}, a depo-lite does ''not'' have strict liability for loss of a {{aifmdprov|Non-EU AIF}}’s  assets, but it still has to give some commitments, and — it being the labyrinthine European Union and everything — these are described in a convoluted way, involving
{{box|In a {{nutshell}}:
{{nutshell AIFMD 21(7)}}
{{nutshell AIFMD 21(8)}}
{{nutshell AIFMD 21(9)}}}}


{{aifmdsnap|36}}
{{Quote|“carrying out the Article 21(8)(a) ''[custody]'' function, as it applies to an entity appointed under Article 38(1)(a) ''[as a depo-lite]'' and in compliance with the technical standards laid out in Article 88 - 91 of the delegated regulation. ''[reporting and safekeeping obligations]''”}}


{{aifmdanatomy}}
This is drastically tiresome, and made only more so by the United Kingdom’s unexpected and lamentable decision to leave the European Union, while trying its best to stay subject to its financial services regulations. as to which:
 
===== The Brexit bugger’s muddle =====
If you wanted an example of the bugger’s muddle that [[Brexit]] created, look no further than the depositary lite regime under AIFMD. Already, beyond a shade of doubt, a bugger’s muddle; now some kind of pan-dimensional bugger’s muddle.
 
So the UK has left the EU, but has adopted its ''directives'' into UK law, while EU ''regulations'', which were automatically incorporated into municipal UK law, were the law anyway, so didn’t need to be specifically adopted.
 
AIFMD, like many financial services regulations, is composed of a directive, but is supported by regulatory technical standards imposed by regulation. I’m sure there was a good reason for this, but I don’t have the energy to find out what it was.
 
===== Basis between “Non-EU AIF” and “third country AIF”? We don’t think so. =====
AIFMD’s depositary lite regime is designed for ''innie'' fund managers — those resident ''inside'' the EU — marketing ''outie'' funds — funds incorporated ''outside'' the EU — to ''innie'' investors, resident in the EU.
 
UK, of course, used to be an innie, and the idea is, as nearly as possible, for all the damage Brexit has done, we remain an innie afterwards, with harmonised alternative fund management regulation.
 
But there’s a little gap: a UK domiciled fund is an ''innie'' for [[UK AIFMR]], but an ''outie'' for EU AIFMD. But conversely, an fund domiciled in the EU is an ''innie'' for the EU, but ''also an innie'' for the UK, because a “third country” AIF means one resident outside the EEA.
 
Now a “third country AIF” under UK regulations means one outside the UK ''and the EEA.'' But a “Non-EU AIF’ under AIFMD means just one outside just the EEA. So a UK-domiciled AIF would ''not'' be a “[[third country AIF]]”, but it ''would'' be a “[[Non-EU AIF - AIFMD Provision|Non-EU AIF]]’. This did my head in for a short while but the upshot is that ''this does not matter''. Here is why:
 
Under EU [[AIFMD]], a UK AIF marketed under national private placement rules would qualify for EU depo-lite treatment, but it would ''not'' qualify for depo-lite treatment under UK rules — being its own primary regulation — so would have to appoint a full depositary the same way a fully blown EU AIF would anyway. The UK is saying, effectively, “''my'' Non-EU AIFs will behave as if they were EU AIFs, even though the EU regulations don’t require them to, because I require them to”.
 
Which is nice.
 
===Appointment language===
You could, and many fastidious [[legal eagles]] will, descend into the pit of a cavernous drafting oubliette trying to explain exactly what a depositary lite does — the interplay between full depositaries and custody only, and full and lite depositary status is enough to send many of them into a funk; interjecting mirroring UK legislation into the game will put them into a bottomless pit of despair. In a fit of affection, we humbly offer the following:
{{quote|'''Depositary lite''': <br>
(a) Where, for the purposes of the Alternative Investment Fund Managers Regulations 2013 (“'''UK AIFMR'''”), you are a “third country AIF” you may appoint us to act as your “Article 36 custodian”. We will carry out that appointment according to prevailing regulations and technical standards as they apply to Article 36 custodians. <br>
(b) Where the EU Alternative Investment Fund Managers Directive (“'''EU AIFMD'''”) applies, an “Article 36 custodian” means an entity appointed under Article 36(1)(a) of EU AIFMD to carry out the safekeeping of financial instruments that can be held in custody.}}
 
===[[Prime broker]] as depositary lite===
A [[prime broker]] will be keen to act as custodian for a {{aifmd|Non-EU AIF}}, where it can get its grubby hands on all those lovely [[Rehypothecation|rehypothecatable]] [[custody asset|custody assets]], but it will ''not'' want to assume all liability — since it isn’t required to — so will accept this the role of custodian under {{aifmdprov|21(8)(a)}} ''as it applies to a person carrying out the safe-keeping function under Art. {{aifmdprov|36(1)(a)}}''.
 
[[Tedious]], isn’t it.
 
In any case where the [[PB]] is a depo-lite [[custodian]]:
*There is no need for the usual delegation agreement transferring responsibility and liability from the {{aifmd|depositary}} to the prime broker, because there isn’t a {{aifmd|depositary}} - the {{aifmd|AIF}} appoints [[PB]] directly to carry out the safe keeping;
*The PB won't want to sign an equivalent acceptance of all responsibility and liability directly to the {{aifmd|AIF}} because it isn't obliged to, and why would you?
 
===Does a margin-holder who receives collateral under a pledge count as a delegated custodian?===
It is one thing for a [[prime broker]], who definitely ''is'' safe-keeping for its client, to accept responsibilities as a {{aifmd|depositary}}’s delegate (or, per the above, on a more  limited  basis as a [[depo-lite]]), but what about a [[futures]] [[clearing broker]] or a [[Counterparty|swap counterparty]] who receives [[margin]] under a [[pledge]]? It is hard to see why they would avoid the general drafting under [[AIFMD]], but there are plenty of reasons it doesn’t make any sense. For one thing, a [[title transfer collateral arrangement]], which is economically the same thing, wouldn’t be caught. Practically that may be the answer: ''just don’t take [[collateral]] under a [[pledge]]'' — or don't take [[non-cash collateral]] at all — but under the forthcoming [[Regulatory IM]] regime that might be difficult, right?
 
WE SHALL SEE.
 
By the way, the picture is of the Texas Book Depository, where there is a ''light'' on. Geddit??
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