Template:Delegate vs subcontractor: Difference between revisions

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 *Funds — particularly hedge funds and AIFs, but sometimes UCITS too — like to invest “on margin”, borrowing funds from a prime broker against the security of the assets it purchases with the margin loans.
 *Prime brokers like to have assets to it can use them, defray its funding costs and manage its balance sheet.
-*Structural problem therefore: Depositary is meant to hold the assets, but it can't lend against them. PB wants to lend against assets, but the depositary is meant to hold them. Answer: the [[depositary]] ''delegates'' the custody function to the [[prime broker]]. Both {{tag|AIFMD}}<ref>Art {{aifmdprov|21(8)}}</ref> and {{tag|UCITS}}<ref>Art {{ucitsprov|22a}}</ref> allow this in certain circumstances
+*Structural problem therefore: Depositary is meant to hold the assets, but it can't lend against them. PB wants to lend against assets, but the depositary is meant to hold them.
-Because a [[prime broker]] needs the assets. To use them.
-— quite common under {{tag|AIFMD}} and {{tag|UCITS}} regulation, where a fund must appoint  a local depositary as nominal custodian, but where the fund’s [[prime broker]] is usually keen to have [[custody]] of assets it has [[margin loan|lent against]], so it can [[rehypothecate]] them —
 :“Hold on,” says the PB. “If the [[depositary]] holds the assets, then I can hardly [[rehypothecate]] them, can I, and we know how important [[rehypothecation]] is to my business model, don’t we?”
 :The [[depositary]] shrugs. “So, I'll make you my [[sub-custodian]],” he says, “There: re-hypothecate to your heart's content.”
 :“No can do,” says the [[PB]]. “I can only rehypothecate against [[indebtedness]], and you don't owe me anything. Only the fund does. And besides, as a [[sub-custodian]] I only see an omnibus account. I don't know who owns what. For [[rehypo]] to work, I have to have a direct contractual relationship with the Fund. That's the deal.”
+Answer: the [[depositary]] ''delegates'' the custody function to the [[prime broker]]. Both {{tag|AIFMD}}<ref>Art {{aifmdprov|21(8)}} AIFMD.</ref> and {{tag|UCITS}}<ref>Art {{ucits5prov|22a}} UCITS V.</ref> allow this in certain circumstances.
-Contrast that with a [[custodian]] who ''sub-contracts'' his responsibility to a [[sub-custodian]]. This is not a delegation in the same way: the [[custodian]] stays liable the whole time, whatever the [[sub-custodian]] does, and unless the contract says otherwise<fref>Okay, I grant you: this is a big ''unless''.</ref> the client has not [[privity|direct claim]] against the subcustodian at all.