New obligations and responsibilities of the Depositary | Deloitte solution
The role of the Depositary bank in Luxembourg and across Europe is under scrutiny. UCITS Directives III and IV did not succeed in clarifying the roles and responsibilities of the Depositary, or moving them on with the evolution of the market. The day-to-day life of Depositaries has nevertheless evolved towards a more complex environment. With an increasing level of service required from Depositaries, a trend to increasingly complex products, an increasing number of stakeholders, wider geographical footprint, increasing industry and regulatory events, we observe a need to realign regulation with the role now played by Depositaries. The emergence, or the “coming of age” of new asset classes (e.g. Real Estate, Private Equity, collectible assets) have also broadened the need to formally differentiate safekeeping on financial assets and supervision on tangible assets. All this will be clarified by the forthcoming AIFMD and UCITS V implementation in Luxembourg law.
The AIFMD gives the option to Member States to extend eligible depositaries to include certain professional entities other than credit institutions and investment firms.
Unlike some other countries, Luxembourg will use this option by introducing a new article in the Banking law of 1993 creating a new category of PSF “professional depositary of assets other than financial instruments” in order to adapt the depositary regime to the specificities of the alternative funds industry and the nature of the assets in deposits, in particular for private equity and real estate funds.
I. From an organisational point of view:
- Identify and set up the right reporting line for the Depositary supervisory function; and
- Ensure Depositary staff has sufficient knowledge about regulation to perform the function.
- Make sure the right skill sets are available in your organisation to differentiate between safekeeping of financial assets and supervision of tangible assets
II. Set-up an appropriate initial and on-going due diligence process:
- On the traditional network which comprises the sub-custodian network; and
- On the non-traditional network, characterised by the involvement of brokers and other third-parties which do not act through the traditional clearing systems.
- Ensure the application of a risk based approach prioritising those counterparties most at risk, typically, third Party Asset Managers and alternative asset classes, those that are more complex to operate for a depositary.
III. Implement a practical and efficient Control Framework in order to safeguard the the Depositary’s responsibilities:
- It is key to define the right areas, frequencies, stakeholders and breadth of the controls framework;
- Make sure IT systems and counterparty static data enables the implementation of the Depositary controls framework;
- Adapt the controls framework to the asset class (financial assets are not monitored the same way as non- tangible assets);
- Ensure the right documentary disclosure is applied in each contract / constitutional document of the fund in order to ensure the Depositary’s access at all times to the fund’s assets, that investors are informed about the risks related to the various counterparties of the fund (e.g. re-hypothecation) and the depositary receives all the necessary information from the sub-custodians and counterparties (i.e. to know at any time where the assets are held and how they are invested); and
- For non-credit institutions/investment firms, the entering of the depositary market will require
- a streamlining of their processes and flows in a depositary environment,
- review of their capital requirements and insurance to support the liability of the depositary function, find the appropriate model to safekeep the financial part of the assets of the fund (which may be up to 30% of the fund’s assets)
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