Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Services Regulation 86 Prior to this, the UK’s FCA issued in September 2016 a Handbook Notice No.37, where it states (paragraph 3.39): 9 The UCITS depositary does not need to maintain a duplicate set of custody records of the relevant assets as the appointed delegate (for the purposes of compliance with CASS 6). 10 Similarly, the appointed delegate does not need to maintain two duplicate sets of custody records of the relevant assets on behalf of the UCITS depositary. This is the same as that for AIF depositaries that delegate their functions relating to the custody of the AIF assets to a third party delegate. With regard to the CSD issue raised by ESMA in the CfE, it issued an opinion to the European Parliament, the Council and the Commission (the EU institutions) on 20 July 2017 in relation to Asset Segregation and application of depositary delegation rules to CSDs. 11 The opinion states (paragraph 78), in order to clarify the ambiguity caused by AIFMR article 89 and AIFMD article 21: ESMA is of the view that the EU institutions should clarify that the depositary shall ensure that the financial instruments are properly registered in its books and records in accordance with article 21(8)(a)(ii) of the AIFMD and Article 22(5)(a)(ii) of the UCITS Directive at all times. What triggered a renewed debate in 2018? Following this ESMA opinion, the European Commission issued the draft delegated regulation on 29 May 2018 and opened public consultation until 26 June 2018 for the industry to provide its views. 12 The draft legislation makes the following key amendments in relation to delegation: Article 89 • Where safekeeping is delegated, a depositary is required to maintain its own books and records. • A depositary has to perform reconciliation between its own records and records of the third party to whom safekeeping is delegated. The factors to consider while determining the frequency of reconciliations were provided. Article 98 • Certain provisions are now prescribed for the agreements between the depositary and the delegate. Article 99 • Asset segregation requirements codified in the article with respect to the delegate. Depositaries are required to verify that third parties take steps to ensure that assets of AIF are kept separate from the depositary’s own assets, assets of the delegate and assets of other clients of the delegate. • Depositaries require an independent legal opinion for markets where assets of AIFs are held. The issue of depositaries maintaining their own books and records was again challenged by the majority of respondents. These included organisations such as the Association of Global Custodians (AGC), the Irish Funds Industry Association (Irish Funds), the Association for Financial Markets in Europe (AFME) and the UK Depositary and Trustee Associate (DATA). A full list of respondents and their responses is provided on the Commission website. 13 Respondents raised concerns that adding the requirement for depositaries to maintain their own books and records in the delegation model would only duplicate the records without providing any additional investor protection. And it would potentially also create additional operational requirements and burdens with little or no additional investor protection.