Similarities in depositary liability under AIFMD and UCITS V

With the 22 July AIFMD deadline soon upon us, the publication of UCITS V in the Official Journal of the European Union is anticipated to arrive at a similar time. One key aspect of UCITS V will be harmonisation with AIFMD – depositary liability under AIFMD and UCITS V will become similarly aligned.

The similarities will encompass depositary liability under AIFMD and UCITS V for the areas of depositary appointment, safekeeping, cash flow monitoring and oversight duties. The most obvious alignment between the two directives is the need for fund managers to appoint a single depositary for each fund under their management.

The requirements of the depositary, however, vary a little between each Directive. Under AIFMD, a depositary suitable for appointment under UCITS V is also suitable under AIFMD. Under both, a depositary must be an EU credit institution. UCITS V further states that other legal entities, outside of central banks, that have been approved by the relevant competent authority can act as a depositary, subject to the CRD IV equivalent capital requirements.

The depositary must also be based, or have a registered office, in the member state of the fund. For non-EU funds under AIFMD, the depositary must be in the home member state in which the fund is established. So, for example, if the fund is established in Luxembourg, the depositary acting on behalf of that fund must also be in Luxembourg.

The major divergence between AIFMD and UCITS V is the depositary-lite regime under AIFMD. This affects the marketing of non-EU funds into Europe by non-EU and EU domiciled fund managers. The depositary-lite, or depo-lite, model is the same as the full depositary model, with the exception that the depo-lite does not assume strict liability for the restitution of losses of fund units in its counterparty network. It is still responsible for cash flow monitoring, safekeeping and oversight, though.  

For the provision of safekeeping to be provided by the depositary under both Directives, they are aligned. UCITS V will bring itself in line with the provisions laid out under AIFMD when it is implemented, anticipated as things stand, in January 2016. It will distinguish between those financial instruments that can be kept in custody and those that cannot. This impacts upon the safekeeping duties and liability of the depositary. The definition of safekeeping is also aligned under both Directives.

The only area of divergence between safekeeping duties under AIFMD and UCITS V is in the area of asset re-use. Segregation requirements are the same – depositaries must keep accounts in segregated names on behalf of their clients – and cash flow monitoring duties are also aligned.

The difference in asset re-use is defined by the two texts. Asset re-use under UCITS V can only be done for the benefit of the AIF. Under AIFMD, it can only be done with the consent of the AIF. Broadly speaking, both permit the re-use of assets held by the depositary, but for differing reasons.

The delegation requirements, too, are broadly aligned. The major divergence under both is when it comes to CSDs (central securities depositories). Liability under AIFMD does not see the depositary assume strict liability for losses at the CSD, whereas under UCITS V, the depositary is liable for the CSD. This could all change, however, with the advent of T2S:

In a further move to harmonise the two Directives, UCITS V will align its liability regime with AIFMD. The only exception will be the discharge of this liability, which can be done under AIFMD, but not UCITS V. Depositary liability under AIFMD can be discharged if the depositary can prove it met all of its requirements, or there is a written contract transferring liability from the depositary to one of its third parties, or there is a written agreement with the AIF allowing a discharge of the depositary’s liability. No such discharges are available under UCITS V.

Whilst the two Directives are broadly similar in approach, with UCITS V seeking to further harmonise its outline with that of AIFMD, it does make sense for some differences to remain. The retail investors that UCITS V seeks to protect require a higher level of protection than professional investors. It is, therefore, not always appropriate that UCITS V follows AIFMD.

For those depositaries that are still working towards their AIFMD offering – many applications still lie with the national competent authorities pending approval – there will be a lot more work ahead in then becoming compliant with UCITS V.

It will remain a more stringent Directive than AIFMD.

Tags: CSDAIFMDUCITS VRegulationEurope