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===“[[External event beyond its reasonable control]]”=== | ===“[[External event beyond its reasonable control]]”=== | ||
Both AIFMD (Art {{aifmdprov|21(12)}}) and UCITS (Art {{ucits5prov|24}}) exempt the depositary for liability from loss arising from “an external event beyond its reasonable control”. So the unexpected insolvency of a delegate or subcustodian is an event beyond the depositary’s reasonable control, right? This was certainly the hopeful expectation of the European Banking Federation in its submissions to that effect of September | Both AIFMD (Art {{aifmdprov|21(12)}}) and UCITS (Art {{ucits5prov|24}}) exempt the depositary for liability from loss arising from “an external event beyond its reasonable control”. So the unexpected insolvency of a delegate or subcustodian is an event beyond the depositary’s reasonable control, right? This was certainly the hopeful expectation of the European Banking Federation in its submissions to that effect of September 2011<ref>See [http://www.ebf-fbe.eu/uploads/documents/positions/FinMark/D1444E-2011_EBF_Response_to_ESMA_AIFMD_implementing_measures_consultation.pdf here].</ref>. | ||
''Wrong''. According to ESMA’s final 500-page bunker-busting advice from 2011<ref>Which you can find [https://www.esma.europa.eu/system/files_force/library/2015/11/2011_379.pdf here, at page 182].</ref>: | ''Wrong''. According to ESMA’s final 500-page bunker-busting advice from 2011<ref>Which you can find [https://www.esma.europa.eu/system/files_force/library/2015/11/2011_379.pdf here, at page 182].</ref>: | ||
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:''3. Despite rigorous and comprehensive [[due diligence]], it could not have prevented the loss.'' | :''3. Despite rigorous and comprehensive [[due diligence]], it could not have prevented the loss.'' | ||
The “[[omission]] of a | The “[[omission]] of a sub-custodian to meet its obligations” — albeit through its [[insolvency]] (and associated failures in internal segregation etc) is thus not an “external event beyond the reasonable control” of the [[depositary]]. Treat this exemption as being limited to genuine [[force majeure]] events — [[acts of God]], war, insurrection, malign operation of the trade winds, etc — or peculiarities in the [[insolvency]] law in the [[sub-custodian]]’s jurisdiction which mean the assets are unavoidably tangled up in the insolvency estate. | ||
Here’s para 27 and 28 of the selfsame opinion<ref>ibid, page 184.</ref>: | |||
:''27. As for the insolvency of a [[sub-custodian]], as suggested in the draft advice in relation to the definition of a ‘loss’, [[ESMA]] considers that the [[financial instrument]]s held in [[custody]] by that entity should not automatically be deemed lost since there is a reasonable chance they will be recovered at the end of the legal proceedings thanks notably to the [[sub-custodian]]’s obligation to comply with the [[segregation]] requirements defined in Article {{aifmdprov|21(11)(d)}}(iii) and the corresponding implementing measures. However, [[ESMA]] has identified three situations where [[instrument]]s may be lost following the [[bankruptcy]] of a [[sub-custodian]]: | |||
::''(i) where the sub-custodian failed to implement the segregation rules, | |||
::''(ii) where the law of the country where the instruments were held in custody does not recognise the effects of such segregation requirements and | |||
::''(iii) finally some industry representatives have highlighted that in any insolvency, a small percentage of the assets may be lost due to the disruption in the entity’s activity in relation to its default.<br> | |||
:''28. In the second situation, where the financial instruments are ‘lost’ following the liquidation of a [[sub-custodian]] despite appropriate [[segregation]] of assets, because the law of the country where the [[financial instrument]]s were held in [[custody]] does not recognise the effects of segregation, [[ESMA]] believes that the loss of those financial instruments should be considered due to be an external event, i.e. the local legal/regulatory framework. In the two other situations – ceteris paribus – the depositary would be held liable.'' | |||
These situations aside, the [[depositary]] remains liable for the insolvency of [[sub-custodian]]s. Even un[[affiliate]]d ones. <br> | |||