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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→‎What about assets posted as margin?

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 ===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.
+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 explicitly by way of margin for unrelated exposures or liabilities? Surely you can use those, right? Here it depends what kind of margin it was ([[Initial margin|initial]] or [[Variation margin|variation]]) and how the {{tag|UCITS}} transfers it to you in the first place. In a nutshell, [[variation margin]] is easy; [[initial margin]] a bit more of a trick.
 *'''[[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, 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}}:
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 . 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)}}”.
+For Regulatory IM it is probably no biggie that you can’t do anything with it, since you are not really meant to do anything with it anyway. The assets are meant to be immobilised, away from the clutches, insolvency risk and rehypothecatory designs of your broker and the fragile, feather-weight, jacked-up-on-[[vega]] credit-quality of the client.  but for [[ETD]] it’s  a different story. Your broker will need to punt your margin down the line to satisfy its own IM requirements to the clearing house anfd intermediate brokers. If it can’t freely reuse your initial margin, it will have to fund its own. ''And guess who is going to pay for that''.
 {{seealso}}
 *[[Rehypothecation]]