On 30th October 2018, following the opinion issued by the European Securities and Markets Authority (ESMA) on asset segregation and application of depositary delegation rules to CSDs, the European Commission published the following delegated regulations:
The new regulations seek to harmonise the approach and provide greater consistency with regards the obligations of depositaries relating to the safe-keeping of assets of AIF and UCITS.
Last week, on 1st April, the regulations started to apply for UCITS and AIFs.
Key amendments introduced by the regulations include:
Reconciliation
The regulations require that reconciliations are conducted as frequently as necessary between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated. This must be done in accordance with Article 22a of Directive 2009/65/EC and Article 21(11) of Directive 2011/61/EU respectively.
The frequency of the reconciliations shall be determined on the basis of the following:
(a) the normal trading activity of the AIF or UCITS;
(b) any trade occurring outside the normal trading activity;
(c) any trade occurring on behalf of any other client whose assets are held by the third party in the same financial instruments account as the assets of the AIF or UCITS.
Delegated Safekeeping
Where a depositary has delegated its safekeeping functions, with regard to assets held in custody, to a third party, the depositary must ensure that the contract in place ensures a guarantee of the depositary’s right to information, inspection, and access to the relevant records and financial instruments accounts of the third party holding assets in custody to enable the depositary to fulfil its oversight and due diligence obligations. In particular, the depositary must be allowed to:
- identify all entities within the custody chain;
- verify that the quantity of the identified financial instruments kept in custody by the third party
Recordkeeping
Where safekeeping functions have been delegated wholly or partly to a third party, a depositary shall ensure that the third party keeps all necessary records and financial instruments accounts to enable the depositary at any time and without delay to distinguish assets of the depositary’s clients from the third party own assets, assets of the third party’s other clients and assets held for the depositary for its own account.
Omnibus Accounts
Assets of UCITS clients, AIF clients and other clients of one depositary may be held in an omnibus account. The omnibus account should always exclude the proprietary assets of the depositary and the third party’s proprietary assets as well as assets belonging to other clients of the third party. Correspondingly, in cases where the custody function is further delegated, the subcustodian should be able to hold assets of the delegating custodian’s clients in an omnibus account. This omnibus account should always exclude the sub-custodian’s proprietary assets and proprietary assets of the delegating custodian as well as assets belonging to other clients of the sub-custodian. This is necessary in order to achieve a healthy balance between market efficiency and investor protection.
Third Country
In line with existing requirements for UCITS, where depositaries of AIFs delegate custody to a third party located in a third country the depositary shall ensure it receives legal advice from an independent natural or legal person confirming that the applicable insolvency law recognises the following:
- the segregation of the assets of the depositary’s clients from the third party’s own assets, from the assets of the third party’s other clients and from the assets held by the third party for the depositary’s own account;
- the assets of the depositary’s AIF clients do not form part of the third party’s estate in case of insolvency;
- the assets of the depositary’s AIF clients are unavailable for distribution among, or realisation for the benefit of, creditors of the third party to whom custody functions have been delegated.
How Funds-Axis can help
Our monitoring solution for Depositaries is an out-of-the-box system for investment compliance, regulatory reporting and cash flow monitoring.
It provides the following functionalities to ensure compliance with UCITS V and AIFMD:
- Transaction Register functionality
- Easily capture all non-custody assets – including derivatives, deposits, private equity, real estate
- Links to related documents
- Automated and manual input, to include multiple file formats from multiple brokers / counterparties
- Automated monitoring of all fund cash flows
- Monitor against limits, frequency, approved payees etc…
- Monitoring for non-timely settlement of cash flows
- Monitoring of all UCITS investment rules, prospectus and other limits
- On-going monitoring of AUM vs relevant “threshold limits”
- Leverage Monitoring and Reporting on both Gross Method and Commitment Method
- Liquidity Monitoring and Reporting – considering assets and investor dealing activity
- Automated Production of Investor Disclosures and Regulatory Reporting
- Monitoring and reporting for Portfolio Company Holding Disclosures
- Capture of AIF’s risk profile and monitoring of Internal Risk Limits
- Automated checks to meet requirements for oversight of Fund valuation
- Monitoring for large movers, stale prices, unquoted and suspended stocks, expense accruals etc…
- Derivatives re-pricing
- Capture all subscription and redemption / creation and cancellation instructions
- Reconcile instructions to cash-flows, including on an aggregated basis
- Suite of reports to easily analyse exposure to markets, issuers, brokers and counterparties
- Collateral monitoring, including for excess collateral
- Stock and Cash reconciliations framework – to support reconciliation between Fund Accounting and Custody records
- Value at Risk Monitoring, in association with Statpro
- Stress Testing and Back-testing
