Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 85 • AIFMs must ensure that appropriate and consistent procedures are in place so that independent valuation of AIF assets can be performed. The role of depositaries The role of depositaries has significantly evolved since the AIFMD took effect. A depositary undertakes many functions in relation to AIFMs that include: • Safekeeping and record keeping: depositaries are required to perform both for each AIF. This service can be performed by the depositary itself or can be delegated under the AIFMD. • Oversight: depositaries need to ensure that dealings in units of AIFs are in line with the rules; valuation of fund units are in accordance with the rules and policies of AIFMs; instructions of AIFMs are executed; and transactions and income related to AIFs assets are dealt with in line with AIF’s rules. • Cash monitoring: implement cash monitoring procedures for effective oversight of cash movements. The depositary can delegate its safekeeping responsibilities according to Article 21(11) of the AIFMD, provided that there is an objective reason to delegate and the delegation is not attempting to avoid the spirit of the directive. The depositary has to demonstrate that due skill and care was taken in the selection and the appointment of any third parties and to ensure there is ongoing monitoring in place. Uncertainty over delegation of safekeeping by depositaries In my experience most depositaries opt to delegate custody duties to custodians, prime brokers and agent securities lenders. Depositaries must then ensure that all the above-mentioned requirements in AIFMD Article 21(11) are met by those delegates. On 1 December 2014, ESMA issued a consultation paper on guidelines on asset segregation under the AIFMD. 3 This consultation paper set out ESMA’s proposals for guidelines regarding the asset segregation requirements in case of delegation of safekeeping duties by the appointed depositary of an AIF to a third party (custodian, prime broker, etc.). At the time, respondents to the consultation strongly objected to the points raised by ESMA on asset segregation. Additionally, the consultation highlighted that there were issues in the interpretation of Article 89(2) of AIFMR, i.e. once the safekeeping duties are delegated, who maintains segregated fund-level books and records? Is it the depositary? Or is it the delegate, i.e. custodian, prime broker. etc? It transpired that in practice while some depositaries do maintain books and records, others open AIF or AIFM securities and cash accounts directly at the level of the delegate. 4 Thus this consultation, in summary, created concerns over books and records, reconciliations, asset segregation and effective oversight for depositaries and their delegates. As a result of the feedback from the 2014 consultation, ESMA issued in July 2016 a call for evidence (CfE) with the intention of taking industry views on its concerns. 5 Also included in the CfE, ESMA sought stakeholders’ views on a discrete (but related) issue that relates to any need to provide additional guidance on the notion of custody services and any residual uncertainty over how the depositary delegation rules should apply to central securities depositories (CSDs). Responses to the CfE again served to confirm, in the Commission’s view, the issues around the asset segregation models/ levels and delegation of safekeeping. There were also differences in the interpretation of other regulations that have similar delegation requirements, e.g. UCITS V, MIFID, Client Assets Regime in UK (CASS), etc. 6, 7 Some European regulators started issuing guidance suggesting that it was appropriate for the delegate to maintain books and records on behalf of the depositary. For example, as the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg regulator, states in its 6 July 2017 FAQ paper on its implementation of the AIFMD (FAQ 10.e): 8 With respect to those of the financial instruments sub-custodied by the depositary with a third-party (e.g. prime broker or collateral safekeeping agent), the depositary can rely on the books of the third party so to meet its obligations in terms of records and segregated accounts, provided that the depositary has daily access to the records and segregated accounts maintained by the third-party and that the depositary has performed a due diligence on the third-party ensuring that the records and segregated accounts of the third-party are maintained in accordance with the provisions of the Law of 2013 and the AIFMD-CDR.