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New updates on the safe-keeping duties for depositaries of Alternative Investment Funds

Nelli Galis Manager Legal , PwC Switzerland 14 Jun 2018

The European Commission has published a draft delegated regulation proposing to amend the Delegated Regulation (EU) No 231/2013 to the Alternative Investment Fund Managers Directive (AIFMD) as regards safe-keeping duties of depositaries for Alternative Investment Funds (AIFs). The newly proposed obligations would address depositaries and custodians further clarifying on their duties and ensuring harmonised protection of their clients' assets at EU level.

The AIFMD is an EU Directive that was implemented by the member states into national laws in 2013 and regulates the rights and obligations of the Alternative Investment Fund Managers (AIFMs). In contrary to an EU directive that needs further implementation, a delegated regulation is directly applicable in all member states. The Delegated Regulation (EU) No 231/2013 supplements the AIFMD, inter alia in respect of the depositaries’ role. 

What it is about?

According to the AIFMD and its Delegated Regulation (EU) No 231/2013, AIFMs must appoint a bank as a depositary for their clients’ assets. A depositary can in principle delegate its safe-keeping duties to other banks, custodians, which on their end can further delegate those duties to sub-custodians. A custody chain that needs to be controlled evolves. 

In view of the differences of the securities and insolvency laws in the EU, the proposed delegated regulation aims to unify the interpretation of the safe-keeping function of the depositary and the custodians and thus to safeguard the AIFs’ assets in custody. 

What are the proposed amendments?

The delegated regulation draft proposes the following amendments to the AIFMD and its Delegated Regulation (EU) No 231/2013:

  • The depositary shall maintain a record of the AIFs’ financial instruments accounts and keep a complete overview of its clients’ assets, also where the custody obligation has been delegated to other custodians.
  • The depositary shall reconcile the AIFs’ financial securities accounts and internal records throughout the entire chain of its own accounts and records to those of the last sub-custodian in the custody chain on a regular basis.
  • The agreement between the depositary and the custodian must fulfil certain minimum requirements by ensuring that the depositary has secure access to all information relating to its clients’ assets throughout the custody chain.
  • With regards to asset segregation, it shall be clarified that a custodian can hold assets of the clients of one depositary in an omnibus account, provided that its own assets, proprietary assets of the depositary and assets of other clients of the custodian are being held in segregated accounts.
  • Depositaries which delegate the custody of their clients’ assets to custodians located outside of the EU shall obtain a legal opinion from an independent third party on the insolvency laws of the country the assets will be held in. They shall also ensure that the foreign custodian complies with the national laws of the domicile of the depositary and communicates any changes to the insolvency laws in its country to the depositary.

What’s next?

The European Commission will now consult with expert groups during the next 4 weeks and in case the European Parliament and European Council don’t raise any objections, the delegated regulation will presumably enter into force this year and will be directly applicable 6 months after its publication in all EU member states before the election of the European Parliament in 2019.

Summary
  • update on the safe-keeping obligations of depositaries of AIFs.
  • full traceability of the AIFs’ assets
  • protection also for AIFs, whose custody of assets has been delegated outside of the EU

 

Contacts

Nelli Galis

Manager Legal , PwC Switzerland

+41 58 792 2862

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