New Rules for Depositaries of AIFs and UCITS
As a result of differing national securities and insolvency laws, the European AIF and UCITS regimes have experienced a divergence in the level of protection for financial instruments held in custody for Alternative Investment Funds and UCITS. This has brought about the requirement for the adoption and eventual implementation of the amendments to Delegated Regulations 2016/438 and 231/2013 on the safe-keeping of depositaries of both UCITS and AIFs.
The new rules will become applicable on the 1st April 2020, and will seek to clarify and ensure consistency on the separation of assets for investor protection and market efficiency purposes, inter alia by minimising the risk of loss of assets held in omnibus financial instruments accounts. In this regard, Commission Delegated Regulations 2018/1618 and 2018/1619 will introduce new provisions for the purpose of ensuring the proper implementation of provisions on safe-keeping obligations under the UCITS and AIFM Directives.
The main changes made by the Commission Delegated Regulations will include provisions on the following rules:
- Asset segregation rules, including the continuous obligation to keep the assets of the depositary separate and distinct from the assets of UCITS and / or AIFs held in omnibus accounts;
- Reconciliations rules on the obligation to conduct reconciliations between the depositary’s own accounts and records, and those of the third party custodians;
- Legal considerations, including the requirement to seek legal advice on the insolvency law applicable in the host Member State of a third party custodian, as well as on the level of protection provided by that particular jurisdiction to segregated financial instruments accounts;
- Rules on the delegation contract, which will require guarantees in favour of the depositary in respect of the right to information, inspection and access to the delegate’s records and accounts, for oversight and due diligence purposes.