New European Regulation - AIFMD and UCITS V - A Tsunami for Custodians

Two pieces of legislation, driven by the European Commission, are going to affect the way investor assets are supported by the global custodian community in the European Union.

  1. Alternative Investment Fund Management Directive (“AIFMD”) comes into effect by 22 July 2013. AIFMD creates a regulatory and supervisory framework for AIF’s and AIFM’s. It requires a Fund’s Depositary (i.e. Custodian or other acceptable organisation) to become fully responsible for all the assets (cash, securities and units in funds etc.) in its custody and that restitution is made for any losses that occur. The only way to avoid liability is if a Depositary can demonstrate that the losses were 1) not permanent, 2) external, 3) beyond its reasonable control and, 4) avoidable with reasonable efforts of the depositary. The burden of proof is reversed and the Depositary has to show that it was not negligent in the process that gave rise to the loss.
  2. Undertakings for Collective Investment in Transferable Securities (“UCITS V”) is expected to become effective at the end of 2014. It has taken many of the principles of the AIFMD, particularly Depositary liability. It relates to funds invested in by retail investors.

Issue – the loss of invested assets held in alternative and retail funds continues to be an issue due to fraud (e.g.Madoff) and other errors. Custodian banks keep picking up the cost and remain embroiled in a multitude of actions. Madoff may have been the trigger for the AIFMD legislation but on-going losses are not infrequent. Under AIFMD and UCITS V, Depositaries will be liable unless they can demonstrate that they acted without negligence.

Complication – most custodians do not have the procedures, controls and technology in place to demonstrate on-going monitoring of local capital markets, subcustodians and transfer agents. The world has changed. Custodians, in the capacity of Depositaries, are now being forced to act as principals and no longer as administrators unless proven otherwise. It follows that no matter how good an individual network manager, or the network team, a new standard of care and burden of proof now exists that will make it very hard for a Board of Directors of a bank to be comforted that the existing network management arrangements can be shown – beyond reasonable doubt – to meet the new standard of care. 

Solution – Thomas Murray Data Services (“TMDS”) provides all custodians, acting as Depositaries under AIFMD (and UCITS V in the future), with a comprehensive solution to meet these new requirements through our fully auditable technology, monitoring of capital market data, subcustodians/CSD risk assessments and transfer agency monitoring.

New European Regulation - AIFMD and UCITS V - A Tsunami for Custodians.