This is the fourth in a series of five thought pieces Thomas Murray wishes to share with clients this summer, the questions for our fields of expertise before the amorphous Brexit project takes shape.

In response to the 2007-2009 financial markets crises, and in line with G20 direction on restoring global economic growth, a primary objective of the European Commission was to shore up gaps in capital markets regulation wherever they were to be found.   As regards custody, the partially overlapping segments of central securities depositories and custody banks have been subject to colliding regulatory purposes and often contradictory official projects – if confusing, this is somewhat understandable given that the two domains fall between capital market and banking legislation/regulation, each subject area with its own points of view.  This still needs sorting out, and that clarification of duties and compliance will take place in the near background whilst the British exit from the EU is defined and executed.

Fund managers have traditionally based their funds offshore to ensure they can distribute their funds to investors everywhere without worrying that the income and capital gains they generate might be taxed at a higher rate than their investors appreciate. ACS, the as yet little noticed onshore vehicle created by the UK government and tax authorities, might be about to rewrite that logic.

Ed Turner of HSBC provides an overview of ACS, the new UK fund vehicle:

The liability regime in a classic global custody agreement is straightforward. The global custodian undertakes to provide the safekeeping services to the high “standard of care” – this is the actual phrase used – expected of a first class service provider. Asked to describe what makes a custodian first or second class, Peter Richards-Carpenter, a consultant to London law firm Berwin Leighton Paisner, draws on 30 years’ experience of grimy commercial realities. “The first class global custodian is the one that clients expect to make them whole in the event of loss,” he says.

The Central Bank of Ireland has approved an Irish regulated UCITS fund, a sub-fund of the Arisaig Global Emerging Markets Consumer UCITS fund, to invest directly in China-A shares via the Shanghai-Hong Kong Stock Connect programme. HSBC Institutional Trust Services (Ireland) has been appointed as the custodian bank to the fund’s operations.

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.