Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Services Regulation 84 The most recent questions have arisen specifically around the role of depositaries in the event of delegation, and associated segregation requirements. For example: A DELEGATE’S VIEW OF THE AIFMD Ever since the implementation of the Alternative Investment Fund Managers Directive (AIFMD) and its implementing Regulation (AIFMR), the role of depositaries and their delegates has been a major talking point within the industry, which includes parties such as depositaries, custodians, prime brokers, agent lenders, national regulators, the European Securities and Markets Authority (ESMA) and the European Commission. 1, 2 regulates the managers of AIFs (AIFMs) and not the AIFs directly. Unless exempted, the AIFMD applies to the following managers: • EU AIFMs who manage EU and/or non-EU AIFs. • Any non-EU AIFMs who manage EU AIFs. • And non-EU AIFMs marketing their non-EU AIFs in the EU. Summary of key impacts of the AIFMD on AIFMs • AIFMs are required to obtain authorisation from an appropriate regulator in a Member State. • AIFMs have minimum capital requirements to comply with. • Marketing provisions that AIFMs have to adhere to, i.e. only marketing to professional investors (although Member States can impose requirements for retail AIFs). • Appointment of a depositary for each AIF it manages (note: prime brokers could not adopt the role of depositary unless certain criteria is met and safeguards, procedures and controls are put in place). • Introduction of remuneration policies that promote sound and effective risk management and mitigate aggressive risk taking. • Leverage requirements, i.e. AIFMs to demonstrate that maximum leverage limit is reasonable and is not breached. • Conditions and limitations imposed on AIFMs in relation to delegation of any of its duties and responsibilities. • Disclosure and transparency requirements in relation to regulators, employees and investors. • Application of liquidity management processes to monitor liquidity risk and ensure the liquidity profile of each AIF’s underlying investments complies with its objectives. • Does the depositary need to maintain its own books and records if it delegates safekeeping? • Where safekeeping is delegated, does the depositary need to implement controls and reconciliations with the delegates? • How much asset segregation is required in the custody chain between the depositary and the local market custodian? Is it acceptable to hold a fund’s assets in omnibus accounts? • And what level of access does a depositary need to have in relation to the delegate to be able to discharge effective oversight? This article explores the background of these discussions and recent updates. Background of AIFMD The AIFMD was introduced by the Commission in response to the 2008 financial crisis and its impact on unregulated investment funds, not only in the EU, but also around the world. EU Member States were required to transpose the AIFMD into their national laws by 22 July 2013. The main purpose of the AIFMD was to harmonise regulation of parts of the investment fund sector. The aim was to put a regulatory framework around firms that operate alternative investment funds (AIFs) like hedge funds, investment trusts and private equity firms that had previously been subject to lighter regulation. The AIFMD