Template:Delegate vs subcontractor: Difference between revisions

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 *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.
-'''Careful though''': Both CASS  and {{tag|AIFMD}}/{{tag|UCITS}} are a little sloppy in their use of the word “[[delegation]]”, using it on occasion to mean a [[subcontract]]<ref>See, for example {{tag|CASS}} {{cassprov|6.3.4}}, and the flush text after {{tag|AIFMD}} Article {{aifmdprov|21(11)}}(d).</ref>. {{tag|CASS}} only really talks about [[subcontract]]s, though {{tag|AIFMD}} and {{tag|UCITS}} deal with true [[delegation]] ''and'' [[subcontract]]s.
+'''Careful though''': Both CASS  and {{tag|AIFMD}}/{{tag|UCITS}} are a little sloppy in their use of the word “[[delegation]]”, using it on occasion to mean something that is probably meant to refer to a [[subcontract]]ing arrangement<ref>See, for example {{tag|CASS}} {{cassprov|6.3.4}}, and the flush text after {{tag|AIFMD}} Article {{aifmdprov|21(11)}}(d).</ref>. {{tag|CASS}} only really talks about [[subcontract]]s, though {{tag|AIFMD}} and {{tag|UCITS}} deal with true [[delegation]] ''and'' [[subcontract]]s.
 ====Why delegate?====
-Why do depositaries delegate their custody functions under AIFMD and UCITS then? Market structure is why.
+Why do depositaries delegate their custody functions under {{tag|AIFMD}} and {{tag|UCITS}} then? Market structure is why.
-*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).
+*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 depositary must be independent and must avoid [[conflict of interest|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.
+*[[Prime broker]]s 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.
+*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.
 ::''“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.”''
+::The [[depositary]] shrugs. ''“So, I'll make you my [[sub-custodian]],”'' he says, ''“There: [[rehypothecate]] 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.”''
+::''“No can do,”'' says the [[PB]]. ''“I can only rehypothecate against [[indebtedness]], and ''you'', dear depositary, 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 inside it. 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(11)}} AIFMD.</ref> and {{tag|UCITS}}<ref>Art {{ucits5prov|22a}} UCITS V.</ref> allow this in certain circumstances, but there are complicated rules as to whether the depositary can shift responsibility to the PB.
 ====Further reading====
 For delegation under AIFMD, proceed to Art. {{aifmdprov|21(11)}} AIFMD and take it from there. For UCITS,  start with Art. {{ucits5prov|22a}} of UCITS V.