Financial Services Quarterly Report - Fourth Quarter 2016: Developments in the Luxembourg Financial Sector

Dechert LLP

Dechert LLP

The Luxembourg financial regulator has published a circular on UCITS depositaries, clarifying the organisational arrangements and other rules provided by Luxembourg’s UCI Law and the EU UCITS Regulation. The circular addresses (among other topics) delegation and outsourcing by a depositary, as well as the approval process. As a separate matter, the EU Parliament voted on 1 December to provide a one-year delay – widely welcomed by the financial industry – to the entry into force of the so-called “PRIIPs” Regulation. These developments are discussed below.

New CSSF Circular on UCITS Depositaries

The Commission de Surveillance du Secteur Financier (CSSF) published on 11 October 2016 circular 16/644 on UCITS depositaries (Circular), which contains clarifications on the organisational arrangements and other rules provided for by the Luxembourg UCI Law1 and the UCITS Regulation,2 and also clarifies certain aspects not expressly covered by these rules. The Circular is addressed to credit institutions acting as UCITS depositaries as well as to all Luxembourg UCITS funds and, where applicable, to their management companies.

The Circular replaces CSSF circular 14/587 (Former Circular), which was to be repealed and replaced to take into account the transposition of the UCITS V Directive3 into the Luxembourg UCI Law and the entry into force of the UCITS Regulation. The Circular confirms most of the rules detailed in the Former Circular. However, as anticipated, the Circular is substantially shorter than the Former Circular, since the Circular does not expressly address topics already covered by the UCITS Regulation. For further information on the Former Circular, please refer to Dechert OnPoint, CSSF Sets Forth Rules for UCITS Depositaries and Clarifies Luxembourg Depositary Regimes.

The Circular entered into force on 13 October 2016, at the same time as the UCITS Regulation. The Circular expressly contemplates that it may be amended to take into account further guidance to be issued by ESMA (such as soon-anticipated guidance regarding asset segregation).

The following are key topics addressed by the Circular.

Designation of the Depositary and Approval Process

The Circular retains substantially the same provisions as the Former Circular in relation to the procedures and criteria to be met by a credit institution in order to act as a UCITS depositary. The Circular further clarifies that additional approval from the CSSF is required only in the case of a fundamental change to the elements of the initial approval (such as significant changes to the operational model or changes in relation to the delegation of a material activity).

Delegation and Outsourcing

The Circular provides a clear distinction between “delegation” (which refers only to the delegation by a depositary of its safekeeping duties) and “outsourcing” (which refers to a depositary’s transfer of all or part of its operational tasks, activities or services to a third party).

With regard to delegation of safekeeping duties, the Circular specifies that the depositary has an obligation to put in place and apply an appropriate due diligence procedure, which must be re-examined regularly (at least once a year) and made available to the CSSF upon request. The Circular also indicates that the depositary’s internal audit function or internal control department has the responsibility to monitor the existence, periodic update and effective application of this procedure.

For outsourcing, the Circular makes a further distinction between outsourcing of “material” and “non-material” activities. The outsourcing of a material activity is subject to prior approval by the CSSF4 and to stricter risk management rules. According to the Circular, a “material” activity is any activity necessary for the sound and prudent management of risks, as well as any activity which, if not carried out in accordance with the rules, would reduce the ability of the depositary to comply with regulatory requirements or to continue its operations.

The Circular provides that any outsourcing shall be subject to a contract. When an activity is material, the contract must specifically provide that the CSSF is granted direct access to the premises of the entity to which the material activity has been outsourced. The Circular also indicates that outsourcing must be made in accordance with the principles set forth in sub-chapter 7.4 of CSSF Circular 12/552.5

Independence Requirement and “Part II” Funds

The Circular does not provide any new guidance in relation to the independence required between (i) the depositary and (ii) the UCITS and its management company. However, it is anticipated that guidance on this topic will be provided soon by the CSSF.

The Circular also does not provide any guidance on the application of the UCITS depositary regime to investment funds subject to Part II of the UCI Law (Part II Funds). This topic is addressed, however, in the draft bill 7024 deposited with the Luxembourg Parliament on 29 July 2016, which provides that the UCITS depositary regime will apply only to Part II funds that are intended to be marketed to retail investors in Luxembourg. Other Part II Funds (whose offering documents do not allow the marketing to retail investors in Luxembourg) will be subject to: (i) the AIFMD depositary regime, if they are managed by an authorised AIFM; or (ii) the depositary regime provided for by the Luxembourg SIF Law,6 if they are managed by a registered AIFM.

Treatment of Cash

The definition of “other assets” contained in the Circular confirms that cash is considered part of other assets within the meaning of UCITS V.

Applicable Law

The agreement between the depositary and the UCITS must be subject to Luxembourg law.

PRIIPs Update: One-Year Delay Formally Approved by European Parliament

As previously reported in Dechert OnPoints, a new Packaged Retail and Insurance Investment Products (PRIIPs) Regulation (Regulation)7 entered into force at the end of December 2014, and was to apply to firms from 31 December 2016.8 However, on 14 September 2016, the European Parliament voted to object to draft regulatory technical standards (RTS) implementing the Regulation,9 which were prepared by the European Supervisory authorities (ESAs10) and adopted by the EU Commission.

Following this September action, the EU Parliament voted on 1 December 2016 (by 561 votes to 9, with 75 abstentions) to delay the entry into force of the Regulation until 1 January 2018, to allow ESAs to draft a new proposal covering the Key Information Document (KID)11 that will need to be provided to retail investors before they invest in PRIIPs. This one-year delay is widely welcomed by the financial industry, as the ESAs can use the additional time to work on the KID template so that it can provide accurate and useful disclosure for investors.

New RTS should be submitted by ESAs to the EU Commission by 22 December, so that the revised – and hopefully final – PRIIPs framework could be in place during the first half of 2017. New RTS essentially will need to: clarify the treatment of multi-option products; address the methodology for calculation of future performance scenarios; and provide guidance as to the use of the “comprehension alert” (i.e., a statement in the KID notifying investors of the complexity of PRIIPs).

It is worth noting that the Regulation provides a temporary exemption for UCITS, which can continue using the UCITS KIID12 until 31 December 2019. The Regulation also specifies that when a Member State applies rules on the format and content of the UCITS KIID to non-UCITS funds offered to retail investors, those non-UCITS funds can also benefit from the exemption.

As far as Luxembourg funds are concerned, it is expected that non-UCITS funds offered to retail investors (i.e., Part II Funds) will be able to benefit from the exemption, provided that, before 1 January 2018: (i) they publish a “UCITS KIID” for each class offered to retail investors; and (ii) their prospectuses refer to the availability of the “UCITS KIID” upon request or on a website.


1) Luxembourg law of 17 December 2010 on undertaking for collective investment, as amended.

2) Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 supplementing UCITS V Directive with regard to obligations of depositaries.

3) Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions. 

4) This approval is replaced by a prior notification when the activity is outsourced to a Luxembourg credit institution or to a “support professional of the financial sector” subject to articles 29-1, 29-2, 29-3 and 29-4 of the amended law of 5 April 1993 on the financial sector.

5) Circular CSSF 12/552 on administration, internal governance and risk management of credit institutions and investment firms.

6) Luxembourg law of 13 February 2007 on specialised investment funds, as amended.

7) Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products.

8) For further information, please refer to Dechert OnPoint, The Regulation on Key Investor Documents for Packaged Retail and Insurance-Based Investment Products – Key Points for EU and Non-EU Asset Managers.

9) For further information, please refer to Dechert OnPoint, EU Parliament Votes to Object to PRIIPs Implementing Legislation.

10) The ESAs consist of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA).

11) The KID is to be a clearly worded three-page document which will provide investors with a simple overview of the most important details of the product they are buying, including fees, risks and potential performance.

12)  The UCITS KIID (Key Investor Information Document) is a two-page information document that provides (in a mandatory layout) specified information about a UCITS fund, including the fund’s investment objective and policy, investment risk, charges and performance. The UCITS KIID aims to help investors understand the nature and key risks of a UCITS fund in order to make a more informed investment decision; since 2012 this document must be provided to investors before they can invest in the relevant fund.


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