Talk:Delegation of depositary functions - UCITS V Provision

21(11). The depositary may delegate its custody functions described in paragraph 21(8) (but not its other functions), on the following conditions:

(a) it shouldn’t be trying to avoiding its obligations under AIFMD; (b) it must have an objective reason for doing so; (c) it must have carried out due diligence on the third party to whom delegates, and must continuously monitor that third party’s performance; (d) it must ensure the third party meets the following conditions: (i) it sophisticated enough to properly look after the AIF’s assets; (ii) where it holds financial instruments in custody, is effectively regulated, capitalised, supervised and audited; (iii) it segregates the AIF’s assets from its own assets and from the depositary’s assets so that they can be clearly identified as belonging to clients of the depositary; (iv) it does not use the assets without the AIF’s prior consent and prior notification to the depositary; and (v) it complies with paragraphs 21(8) and 21(10). Where assets have to be held in a jurisdiction where no local entities are effectively regulated, capitalised, supervised and audited, the depositary may appoint a local entity which isn’t, but only for as long as there are no local entities that satisfy the delegation requirements, and:

(a) the depositary informs AIF investors must that such a delegation is required, and why, before they invest; and (b) the AIF instructs the depositary to delegate the custody of such financial instruments to such a local entity. The third party may sub-delegate these functions, subject to the same requirements mutatis mutandis. Use of a securities settlement system does not count as a delegation of custody functions. view template

AIFMD full text of Art 21(11): 21(11). The depositary shall not delegate to third parties its functions as described in this Article, save for those referred to in paragraph 21(8).

The depositary may delegate to third parties the functions referred to in paragraph 21(8) subject to the following conditions:

(a) the tasks are not delegated with the intention of avoiding the requirements of this Directive; (b) the depositary can demonstrate that there is an objective reason for the delegation; (c) the depositary has exercised all due skill, care and diligence in the selection and the appointment of any third party to whom it wants to delegate parts of its tasks, and keeps exercising all due skill, care and diligence in the periodic review and ongoing monitoring of any third party to whom it has delegated parts of its tasks and of the arrangements of the third party in respect of the matters delegated to it; and (d) the depositary ensures that the third party meets the following conditions at all times during the performance of the tasks delegated to it: (i) the third party has the structures and the expertise that are adequate and proportionate to the nature and complexity of the assets of the AIF or the AIFM acting on behalf of the AIF which have been entrusted to it; (ii) for custody tasks referred to in point (a) of paragraph 21(8), the third party is subject to effective prudential regulation, including minimum capital requirements, and supervision in the jurisdiction concerned and the third party is subject to an external periodic audit to ensure that the financial instruments are in its possession; (iii) the third party segregates the assets of the depositary’s clients from its own assets and from the assets of the depositary in such a way that they can at any time be clearly identified as belonging to clients of a particular depositary; (iv) the third party does not make use of the assets without the prior consent of the AIF or the AIFM acting on behalf of the AIF and prior notification to the depositary; and (v) the third party complies with the general obligations and prohibitions set out in paragraphs 21(8) and 21(10). Notwithstanding point (d)(ii) of the second subparagraph, where the law of a third country requires that certain financial instruments be held in custody by a local entity and no local entities satisfy the delegation requirements laid down in that point, the depositary may delegate its functions to such a local entity only to the extent required by the law of the third country and only for as long as there are no local entities that satisfy the delegation requirements, subject to the following requirements:

(a) the investors of the relevant AIF must be duly informed that such delegation is required due to legal constraints in the law of the third country and of the circumstances justifying the delegation, prior to their investment; and (b) the AIF, or the AIFM on behalf of the AIF, must instruct the depositary to delegate the custody of such financial instruments to such local entity. The third party may, in turn, sub-delegate those functions, subject to the same requirements. In such a case, paragraph 13 shall apply mutatis mutandis to the relevant parties.

For the purposes of this paragraph, the provision of services as specified by Directive 98/26/EC (EUR Lex) by securities settlement systems as designated for the purposes of that Directive or the provision of similar services by third-country securities settlement systems shall not be considered a delegation of its custody functions.