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 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” 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.
+*“[[Reuse]]” is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” {{ucits5prov|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 {{ucits5prov|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.
+*[[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 {{tag|PB}}-style [[rehypothecation]]  is that the fund avoids a steeper financing charge from the {{tag|PB}} that would be implied were the [[prime broker]] not allowed to [[rehypothecate]] the assets it has financed. In any case {{tag|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.
+*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 transaction - Basel II Provision|collateralised]] (as long as you limit yourself to 100% of [[indebtedness]]) is, as I say, a stretch.
+===What about assets posted as margin?===
+It’s one thing hocking off assets which your client bought with the proceeds of your loan and has asked you to look after: what about assets a client has posted to you by way of margin — initial or variation? Here it depends how they UCITS fund transfers the assets to you in the first place.
+*'''[[Title transfer]]''': Needless to say<ref>Well, it ''should'' be needless to say, at any rate.</ref> if a UCITS fund posts non-cash assets by [[title transfer]], they are the [[broker]]’s to do with as it pleases. But [[variation margin]], these days, tends to be cash, and [[initial margin]] presents a problem, because [[title transfer]] opens up an unsecured exposure to the [[broker]] for the return of the posted assets, and {{tag|UCITS}} funds have tight [[concentration limit]]s for counterparty exposure. So you may find [[title transfer]] is not really on the cards for [[initial margin]].
+*'''[[Pledge]]/[[security interest]]''': Well, the strictures of Art {{ucits5prov|22(7)}} make this a non-starter too.
 {{seealso}}
 *[[Rehypothecation]]
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 *[[UCITS Anatomy]]
 *[[AIFMD Anatomy]]
+{{ref}}