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.
+===But I can still [[rehypothecate]] up to 100% [[indebtedness]], right? ''Right?''===
-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:
+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” {{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.
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 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.
+*'''[[Pledge]]/[[security interest]]''': Well, if you read literally, Art {{ucits5prov|22(7)}} makes this a non-starter too. Here's a [https://www.esma.europa.eu/sites/default/files/library/esma34-45-277_opinion_34_on_asset_segregation_and_custody_services.pdf legal opinion] on use of assets in {{tag|AIFMD}} and {{tag|UCITS}}:
+:''The regime for {{tag|UCITS}} assets is different [to {{tag|AIFMD}}]: pursuant  [Quotes Article as set out in the panel]
+. It is worth recalling the above rules [in Article {{ucits5prov|22(7)}}], in particular to the extent that the ban on the reuse of the UCITS assets for the depositary account should be ensured throughout the chain as it is part of the depositary’s due diligence requirements. Indeed, Article 15(3) of the UCITS V Regulation 2 explicitly foresees that “A {{ucits5prov|depositary}} shall exercise all due skill, care and diligence in the periodic review and ongoing monitoring to ensure that the third party continues to comply with the criteria provided for in paragraph 2 and the conditions set out in [...] Article 22a(3)(a)-(e) of {{t|UCITS V}} and shall at least: […] (d) monitor compliance with the prohibition laid down in [...] Article {{ucits5prov|22(7)}}”.
 {{seealso}}