No reuse of assets by depositary - UCITS V Provision: Difference between revisions

No reuse of assets by depositary - UCITS V Provision (view source)

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 {{ucits5anat|22(7)|UCITS}}
-The famous rule which rules out PB style rehypothecation for UCITS 5 funds. Optimistic PB Salesfolk may try to argue that they can get home under the limited exception as long as you limit rehypo to 100% of indebtedness or less, but this is wishful thinking. The exception is designed to allow {{tag|UCITS}} funds to engage in fully collateralised [[Agent lender|agent lending]], whereby a custodian lends assets into the market on the UCITS’ behalf (as its agent) to earn a positive additional return for the fund, rather than to allow a a custodian to defray its own financing costs from margin lending. To wit:
+The famous rule which rules out [[PB]] style [[rehypothecation]] for [[UCITS V|UCITS 5]] funds.
+Expect optimistic prime brokerage [[sales]]folk to argue that the limited exception will cover PB rephypothecation as long as the PB limits itself to 100% of the fund’s [[indebtedness]]. Alas, this is wishful thinking. The permitted exception to the bar on reuse is designed to allow {{tag|UCITS}} funds to participate in fully collateralised [[Agent lender|agent lending]] programmes. In that case a custodian lends client assets into the market on the client’s behalf (and as its [[agent]]) to earn a positive additional return for the fund. This is a very different thing to allowing a prime broker to play with the fund’s assets to defray its own financing costs from its margin lending on those very assets. To wit:
 *“[[Reuse]]” is defined to include transfer, sale and loan
-*“[[Reuse]]” is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” depository acting as ''[[agent]]'' — like, as an [[agent lender]] — on behalf of the fund, rather than as the fund’s [[principal]] (in which case reuse would be for the account of the depositary). [[Agent lending]] is a very different kettle of fish: there, the custodian has not (necessarily) financed the asset — that is to  say, an agent lending arrangement is in no sense a function of the principal’s indebtedness to the depositary — but rather is a custodian offering to generate some yield enhancement for its clients by lending their assets out into the market, for a fee, against collateral provided by those market borrowers.
+*“[[Reuse]]” is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” depositary acting as ''[[agent]]'' — like, as an [[agent lender]] — on behalf of the fund, rather than as the fund’s [[principal]] (in which case reuse would be for the account of the depositary). [[Agent lending]] is a very different kettle of fish: there, the custodian has not (necessarily) financed the asset — that is to  say, an agent lending arrangement is in no sense a function of the principal’s indebtedness to the depositary — but rather is a custodian offering to generate some yield enhancement for its clients by lending their assets out into the market, for a fee, against collateral provided by those market borrowers.
 *Agent lending “[[reuse]]” is, thus, explicitly for the benefit of the fund [[principal]], in that the fund earns a positive return by doing it. The best you could say of PB-style [[rehypothecation]]  is that the fund avoids a steeper financing charge  from the Prime broker that would be implied were the [[prime broker]] not allowed to rehypothecate the assets it has financed. and in any case UCITS have fairly strict limits against leverage so generally shouldn't be financing assets in the first place.
 *Likewise, the theory of [[rehypothecation]] is that it isn't [[Collateral|collateralised]], and certainly not with high-quality collateral: to the contrary, the prime broker’s right to take assets is dependent on the fund’s indebtedness to the PB, so that there is nothing to collateralise. Arguing that by effectively eliminating indebtedness is kind of like being collateralised (as long as you limit yourself to 100% of indebtedness) is, as I say, a stretch.