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Every [[UCITS]] or [[AIF]] must appoint an independent {{aifmdprov|depositary}}, which must be a [[bank]] or regulated [[investment firm]] based in the fund’s home jurisdiction. To avoid [[conflicts of interest]], generally neither the [[fund]]’s own [[investment manager]] nor its [[prime broker]] (if it has one) can act as a {{aifmdprov|depositary}}, though the {{aifmdprov|depositary}} can delegate certain of its functions to the [[prime broker]], as we shall see. | Every [[UCITS]] or [[AIF]] must appoint an independent {{aifmdprov|depositary}}, which must be a [[bank]] or regulated [[investment firm]] based in the fund’s home jurisdiction. To avoid [[conflicts of interest]], generally neither the [[fund]]’s own [[investment manager]] nor its [[prime broker]] (if it has one) can act as a {{aifmdprov|depositary}}, though the {{aifmdprov|depositary}} can delegate certain of its functions to the [[prime broker]], as we shall see. | ||
In what follows we discuss the {{AIFMD}} {{aifmdprov|depositary}} provisions. If you want to compare those with the {{UCITS}} {{ucits5prov|depositary}} provisions, see the [[JC]]’s handy [[Depositary comparison under AIFMD and UCITS]] feature. Neat, huh? | In what follows we discuss the {{t|AIFMD}} {{aifmdprov|depositary}} provisions. If you want to compare those with the {{t|UCITS}} {{ucits5prov|depositary}} provisions, see the [[JC]]’s handy [[Depositary comparison under AIFMD and UCITS]] feature. Neat, huh? | ||
===What does a {{aifmdprov|depositary}} do?=== | ===What does a {{aifmdprov|depositary}} do?=== | ||
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===What is a {{aifmdprov|depositary}}’s liability?=== | ===What is a {{aifmdprov|depositary}}’s liability?=== | ||
Liability is covered by Article {{aifmdprov|21(11)}} of {{AIFMD}}. The {{aifmdprov|depositary}} is liable to the fund for the loss of custody assets, even where it has delegated the custody function to a third party. Liability is [[strict liability|strict]]: it can only escape liability if the loss was caused by an “an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary”. That doesn’t include delegating to a [[prime broker]]. | Liability is covered by Article {{aifmdprov|21(11)}} of {{t|AIFMD}}. The {{aifmdprov|depositary}} is liable to the fund for the loss of custody assets, even where it has delegated the custody function to a third party. Liability is [[strict liability|strict]]: it can only escape liability if the loss was caused by an “an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary”. That doesn’t include delegating to a [[prime broker]]. | ||
===Can a {{aifmdprov|depositary}} delegate its functions?=== | ===Can a {{aifmdprov|depositary}} delegate its functions?=== | ||
Yes, some of them. This is covered by Article {{aifmdprov|21(11)}} of {{AIFMD}}. Importantly, from a prime broker’s perspective, the custody function. If the prime broker holds the asset it not only has security over it, but it can rehypothecate it. As devoted readers of this site will know<ref>Other people might know this too.</ref>, rehypothecation is a very important part of the economics of margin lending. | Yes, some of them. This is covered by Article {{aifmdprov|21(11)}} of {{t|AIFMD}}. Importantly, from a prime broker’s perspective, the custody function. If the prime broker holds the asset it not only has security over it, but it can rehypothecate it. As devoted readers of this site will know<ref>Other people might know this too.</ref>, rehypothecation is a very important part of the economics of margin lending. | ||
There are strict conditions to the delegation, and it tends to comes with strings attached. | There are strict conditions to the delegation, and it tends to comes with strings attached. | ||
“Delegation” is different from “sub-contracting”: delegation means the third party delegate contracts with the fund directly to perform the function, without the {{aifmdprov|depositary}} intermediating. This is why it is important that the {{aifmdprov|depositary}} remains strictly liable for the performance of the delegated function. | “Delegation” is different from “sub-contracting”: delegation means the third party delegate contracts with the fund directly to perform the function, without the {{aifmdprov|depositary}} intermediating. This is why it is important that the {{aifmdprov|depositary}} remains strictly liable for the performance of the delegated function. | ||