Template:Delegate vs subcontractor: Difference between revisions

===[[Delegate]] versus [[Sub-contract|sub-contractor]]===

Delegation, according to a natural definition, means “''to entrust (a task or responsibility) to another person, typically one who is less senior than oneself.''”<ref>{{google2|Define|Delegation}}</ref>. Being ''[[Delegation|delegated]]'' a [[custody]] function — agreeing to act as main [[custodian]] to a [[fund]] on behalf of the [[depositary]] whom the [[fund]] has appointed to carry out that function is a different thing from being appointed as a [[sub-custodian]].

*A delegating [[depositary]] won't hold the assets ''at all'': it will pass that responsibility to the [[prime broker]], who will record the end client's interests in the custody assets directly in its books and records. It may have to report this all to the depositary, but the depositary will not carry record of the client’s assets in its own books and records.  

*A [[subcustodian]] is an entity who stands behind the main custodian and holds the [[custodian]]'s client assets in a single [[omnibus]] account, in the [[custodian]]'s name but marked as "client assets" and therefore unavailable for the prime broker's creditors. A [[sub-custodian]] won’t know who the custodian's clients are, let alone which assets are attributable to which clients, much less have a contractual relationship with those clients, and won’t be in a position to [[rehypothecate]] any assets it holds.

*AIFs and UCITS funds are required to have a local depositary to look after the fund’s interests, make sure it is properly managed, and to look after its assets. The depostiary must be independent and must avoid conflicts of interest with the fund, such as would arise if the depositary lent to or traded with the fund. A depositary typically cannot act as a prime broker (a bank who lends on margin to hedge funds).

*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.