Appointing a depositary for AIFMD compliance

22 July 2014 saw the end of the grandfathering period for AIFMD (the Alternative Investment Fund Managers Directive) and meant that all AIFMs had to be compliant with the directive. One of the central tenets of compliance was the appointment of a single depositary for each fund managed for the purposes of oversight, cash flow monitoring and safekeeping of assets, with the depositary assuming strict liability for losses incurred in the AIFMs counterparty network.

This did not turn out to be a problem for the majority of established European fund managers, since they were well aware of their obligations from a long way out. They were more concerned, in their conversations with depositaries, about what exactly they would be getting for their money.

“What were we going to do that was different?” asks Ian Headon, senior vice president at Northern Trust. “There is an intangible around compliance in this respect and most of the fund managers were not willing to simply pay extra for the service without finding out exactly what they were getting in return.”

There was certainly little room for surprise amongst the fund management community, although this did not prevent something of a late surge in interest and a clamour to onboard with a depositary in time to meet the deadline. “This created a lot of extra work at the depositaries,” explains Shane Ralph, senior vice president at State Street. “There were some markets, such as private equity, that have been largely unregulated and were new to the depositary process; it was tough for them. There were always going to be challenges around the process, but I would say that it has been a relatively straightforward one. Our clients are getting through it okay, it has been a tough exercise for some, but they are getting through it okay.”

Whilst the majority of European domiciled fund managers were well prepared for the deadline and the directive, with the majority already having had some sort of exposure to depositary functionality, there was still an education process for them to undergo. “One thing we heard frequently throughout the process was, ‘we thought you were doing that already,’” says Headon. “The education process for us as an industry has been huge. A degree of uncertainty had grown – there is a lesson there for UCITS V and VI. This will come up again, why is there more work to be done?”

Another substantial challenge faced by the depositaries has concerned third country fund managers, those domiciled outside of the EU. They are not subject to the same depositary demands as their EU domiciled counterparts, although they still need to appoint a depositary for the purposes of oversight, cash flow monitoring and safekeeping. The crucial difference is that the depositary does not need to assume strict liability for losses incurred in that fund manager’s network of counterparties.

This has given rise to the depo-lite model – a depositary that offers the same services but without assuming liability for losses. “The depo-lite model was a little more complicated, as there was a smaller window to prepare for this,” says Mark Sweeney, branch manager and head of depositary services at Citco. “We only really started looking at it in February and March of 2014. This meant there was a lot of work to prepare these clients for onboarding. It was definitely the depo-lite world where we saw the biggest impact both to our service offering and our clients.”

With these hurdles cleared, most of the industry is in agreement that AIFMD has been implemented relatively smoothly. Where the uncertainty remains, however, is at regulatory level. “My biggest surprise was the regulatory uncertainty that remained as the deadline came and went,” says Roger Fishwick, director at Thomas Murray Data Services. “There was a lot of detail that remained unclear. Elements such as prime broker segregation, for example; it took the regulator until Christmas to release a consultation paper on the topic. It was clear a year before the AIFMD deadline that this was an issue.”

Tags: AIFMDUCITSUCITS VDirectiveEUEuropeFund Management