On 30 October 2018, the European Commission amended1 the Undertakings for Collective Investment Transferable Securities Directive 2009/65/EC (the UCITS Directive) and Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) governing the custodial function of depositaries for open-ended investment funds, collective investment schemes and alternative investments funds (the Funds). These amendments (which came into force on 19 November 2018 and will apply from 1 April 2020) have the aim of:
Depositaries, custodians, sub-custodians, prime brokers or any other entity that is holding assets in custody for a Fund should be aware of the following three key changes that will take effect from 1 April 2020:
Minimum Contractual Requirements in Delegated Safekeeping Arrangements2:
The updated UCITS Directive and AIFMD now set out the details that should be included in the contract between a depositary and any third party sub-custodian to which there has been a delegation of the custody function in relation to assets belonging to Fund clients. In particular, the depositary must be able to:
Clarification on Segregation Levels3:
The level of segregation of Fund assets has been clarified and now expressly permits a third party sub-custodian to hold the assets of Fund clients and the assets belonging to other clients of the same depositary in one single omnibus account.
must be held in different accounts.
In light of these clarifications, third party sub-custodians accepting the delegation of the custody function in relation to assets belonging to Fund clients will be required, at a minimum, to open the following on its books and records:
Non-EU Custodian Condition4:
If a depositary delegates safekeeping functions to a third party sub-custodian located outside of the EU, the depositary is required to obtain legal advice on the insolvency laws relating to such third party sub-custodian. The purpose of the depositary obtaining such advice is to enable it to ensure that the relevant third party sub-custodian is complying with the laws applicable to it when securing the benefits of asset segregation.
Depositaries will therefore need to consider the cost associated with obtaining such legal advice from the outset of entering into such an arrangement with a non-EU third party sub-custodian.
To ensure ongoing compliance with AIFMD and the UCITS Directives, our experienced team at Dentons would be happy to discuss and advise on the updates to these regulations, as well as on any changes that may be required to documentation relating to custody and safe-keeping functions, on agreements between depositaries and delegated sub-custodians and on agreements between sub-custodians and their ongoing custody chain participants.