The depositary banking passport, as mooted under UCITS VI, would bring about greater competition, facilitating cost savings for the buy side and could have far reaching consequences for depositary banking centres such as Luxembourg and Ireland.
The European Commission is currently consulting with the industry on UCITS VI provisions. At present, a depositary to a UCITS fund must be based in the same jurisdiction as that fund. A depositary passport would enable banks to service funds across the EU without having to be located in the same domiciles as their fund clients. This could potentially lead to competition for Luxembourg (US$2.5 trillion in UCITS assets under management) and Ireland ($1.2 trillion), which have historically serviced UCITS funds.
“It may be advantageous for UCITS depositary banks to be located in one location and to passport their services,” says Bill Scrimgeour, head of regulatory and industry and affairs at HSBC Securities Services. “It would be a positive to the industry and would enable us to be jurisdictionally agnostic.
UCITS IV provided a fund passport and suggested a depositary passport, but due to a market turndown around the time that it was implemented (UCITS IV came into effect on 1 July 2011), the idea was shelved. “We would certainly like to see it back on the table,” says Scrimgeour.
A depositary passport would ultimately reduce the operational costs at asset managers as it would enable them to shop around jurisdictions for depositaries. It would also facilitate reduced costs for the depositaries, as Scrimgeour alludes to.
Talk about UCITS VI may seem somewhat premature given that EU Member States have until 18 March 2016 to implement UCITS V, but the European Commission first issued consultation on the subject in June 2012.
A depositary passport could be bad news for the historical UCITS centres, as the banks will be under no obligation to remain in places like Dublin and Luxembourg. It would represent an opportunity for banks to seek out more cost effective domiciles. “We would base any decision as to where to locate upon commercial and expertise considerations,” explains Scrimgeour, talking hypothetically about the prospect of a depositary passport. “There are a number of considerations, such as where the industry is based, depth of experience in the labour market, and relative costs, etc., so we would have to factor in a number of considerations before making such a decision.”
However the depositary passport pans out, it would certainly introduce competition and cost savings in the depositary banking landscape.