Thomas Murray - Depositary banks, prime brokers and AIFMD – the issue of segregated accounts

Depositary banks, prime brokers and AIFMD – the issue of segregated accounts

One of the major areas of the Alternative Investment Fund Managers Directive (AIFMD) that is yet to be resolved, on the eve of the Directive going live, is the issue of account segregation at prime brokers. Whose name should adorn the accounts? Should prime brokers be allowed to continue operating omnibus accounts for fund clients? The industry is still awaiting further guidance from the European Securities and Markets Authority (ESMA) on the subject.

It was a subject that came up in our recent webinar, AIFMD and the relationship between depositary banks and prime brokers. “For the assets for which the depositary is liable, they clearly want their name against them in some shape or form,” said Roger Fishwick, director at Thomas Murray Data Services. “This recognises their interest in controlling them.”

This has not been such a straightforward process. “Our standard approach is to have the client or fund name there,” said Jane Masen, director, EMEA Head Bank Network Management, Citi Bank. “If we get a requirement from the client to include the depositary name in there, then obviously we will work to do that.” It represents a change in the way things have been traditionally done at prime brokers.

“I agree with Jane” added another representative of a prime broker, Gildas Le Treut, global director of Prime Clearing at ABN AMRO Clearing. “We have had a lot of discussions about account naming and have ended up with a lot of different names with the title holder, the depositary or the investment manager. It also depends upon whether the fund is recognised as a legal entity, which is not always the case. We should not look at the account naming without considering the legal structure. If you look at what has been achieved in the UCITS world, where you have accounts in the name of the manager or the AIF, there was still a standard legal agreement with the depositary bank.

“I think with AIFMD we are going in the same direction, but in a more structured way. So far it has been to have the account name in the title holder, mainly the investment manager regarding the AIF, and sometimes with arrangements with the custody so that those transferable assets held within the prime broker administration are in the name of the depositary.”

There is a clear need to include, or at least recognise, the interest of the depositary in the fund’s assets that are held at prime brokers. “I think there is an ideal world and then what we see in practice,” added Ian Headon, senior vice president at Northern Trust Depositary Services. “For the prime brokers to protect their own interests, there is a desire to keep the accounts in the name of the AIF or AIFM. I think the depositaries are looking for some acknowledgement within the naming convention that the depositary has an interest in the account.”

“As an industry we have all been on a massive learning curve,” added Jane. “We have worked incredibly well together to try and understand what the regulation means in the real world and there is still some work to go.”