Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Services Regulation 88 Area Summary Anticipated impact on depositary Anticipated impact on delegates, including, for example, prime brokers Article 89 — Books and Records and Reconciliations The depositary is required to maintain its own independent books and records by opening accounts for each AIF or AIFM acting on behalf of the AIF*. Those records are reconciled with the records of the delegate following an established frequency. That frequency is agreed by considering the factors mentioned in the article. *While we understand it is the Commission’s intention for a depositary to maintain independent books and records, it is unclear if the draft amendments to the Directive actually achieve this. Assuming the position is clarified and text amended to introduce certainty, depositaries that delegate safekeeping will now have to maintain their own books and records. This will have a significant impact on operations, contracts, technology and systems, resourcing, reconciliation platforms, implementation of policies, procedures and controls based on evolving industry practice. Given the complexities involved, depositaries will engage at an industry level to identify the best possible solutions in time for the implementation deadline. Depending on what model the depositary chooses, they will have to facilitate the system and technology build for that. Additionally, depending on the associated costs, they will have to revisit their service charges for the depositary. Article 98 —  Contractual Provisions Depositaries have to ensure that certain provisions are included in the contracts with the delegate. These include: • Guarantee of depositaries rights to information; access to books and records; access to list of sub-delegates, etc. • Details of equivalent rights and obligations between the delegate and sub-delegate. Depositaries will have to revisit their agreements with their delegates to ascertain that provisions prescribed in the regulation are included in the agreement. Delegates will have to revisit their agreements with the depositaries and also with the sub-delegates to ascertain that provisions prescribed in the regulation are included in the agreement. This will incur costs in relation to engaging external legal counsel and repapering existing contracts. Article 99 — Segregation When delegating safekeeping functions to third party, depositary has to ensure and verify that the third party: • Have up to date and accurate books and records that clearly separate assets of depositary’s clients; assets of depositary; assets of third party; and assets of third party’s other clients; • Sends statements to depositary for any changes in those assets; • Conducts reconciliations with records of the depositary; • Have adequate organisational arrangements for protection of client assets. If required, depositaries may need to enhance their ongoing due diligence process in relation to their delegates. Most delegates already follow this model of keeping up to date books and records. So minimal impact is expected. Article 99 — Legal Opinion Where depositary delegates its custody function to a third party, they are required to obtain independent legal advice confirming that applicable insolvency law recognises: • Segregation between the assets of depositary’s clients; assets of depositary’s own assets; assets of third party and assets of other clients of third party; • Assets of depositary’s clients do not form part of third party estate; • Assets of depositary’s clients are unavailable for distribution to creditors of third party. Third party has to ensure that above conditions are met at all times and immediately inform depositary if circumstances change. Reliance can be placed on market legal opinions as per current practice. Delegates would have to revisit the scope of their external market legal opinions to see if all of these factors are captured in the opinion for each market where they are providing custody directly or through a sub-delegate. Key impact of the changes in the AIFMD Regulation