A short (non-exhaustive) overview of the depositary’s obligations under the UCITS V rules.<\/p>\n
Directive 2014\/91 (UCITS V) provides that the depositary’s liability cannot be contractually excluded or limited as regards the loss of instruments held in custody. The directive takes over the main measures of the AIFM directive, applicable to managers of alternative investment funds and their depositaries. It was transposed into Belgian law by the Act of 25 December 2016 (amending the Act of 3 August 2012 on collective investment undertakings) and the Royal Decree of 25 February 2017. In Luxembourg, the matter was transposed by the Act of 10 May 2016 and applies in the light of CSSF Circular 16\/644; Delegated Regulation 2016\/438 on depositaries’ obligations also applies.<\/p>\n
In summary, the depositary bears three obligations: oversight (supervision and control of operations); cashflow monitoring (monitoring of liquidity); and safekeeping (custody, the only obligation that may be delegated).<\/p>\n
Directive 2009\/65, art. 22(3); Regulation 2016\/438, art. 3; no delegation possible.<\/em><\/p>\n The depositary must assess the risks linked to the nature, size and complexity of the investment policy, put in place supervision procedures appropriate to the UCITS and its assets, establish an escalation procedure where potential discrepancies are found, and ensure it can access the accounting books, conduct on-site visits and examine auditors’ reports, with frequent controls and reviews. In particular it must verify that the management company or the SICAV has established and implements procedures to reconcile subscription and redemption orders, amounts and units issued; verify on an ongoing basis that appropriate procedures are in place for valuing the assets and flag any non-compliant valuation; verify that the management company’s instructions comply with its investment strategies (limits, restrictions, leverage), executing instructions unless they conflict with national law or the UCITS documents; detect situations where the counterparty does not deliver within customary time limits and inform the management company; and verify the calculation and distribution of the UCITS’s income (net result, dividends, action where the auditor raises reservations).<\/p>\n Directive 2009\/65, art. 22(4); Regulation 2016\/438, art. 9; no delegation possible.<\/em><\/p>\n This is the monitoring of cash accounts held with an authorised institution, opened in the name of the UCITS, the management company acting for the UCITS (FCP), the investment company, or the depositary acting for the UCITS. Where the accounts are opened in the name of the investment or management company, the depositary must have an overview of all the UCITS’s cash flows. In short, it must know and receive information on all cash accounts and identify the most significant flows; ensure the UCITS’s cash is booked in accounts with an authorised institution or a central bank; carry out reconciliations daily or on each movement; detect at day’s end any flows inconsistent with the UCITS’s activity; and receive information on payments made by investors on subscription or by any third party (transfer agent), ensuring all payments are booked. Appropriate procedures must be in place; unresolved anomalies must be reported to the management and\/or investment company, and if they cannot be rectified, to the authorities.<\/p>\n Directive 2009\/65, art. 22(5); Regulation 2016\/438, art. 13.<\/em><\/p>\n Custody of instruments that can be held in custody and of other assets may be delegated to third parties subject to strict rules. Financial instruments that can be registered in an account or physically delivered to the depositary are subject to a custody obligation and a restitution obligation. Other assets that cannot be held in custody (certain derivatives, registered securities or deposits with other banks) are subject to a supervision obligation: ownership verification and record keeping, with a risk of liability in case of negligence. Segregation of assets must be ensured throughout the custody chain (art. 16 of Regulation 2016\/438, art. 22a of Directive 2009\/65): regular reconciliations between the depositary’s and third parties’ accounts and records, all due diligence guaranteeing a high level of investor protection, appropriate organisational arrangements to minimise the risk of loss from fraud, poor management, inadequate record keeping or negligence, verification of the UCITS’s ownership right, and a prohibition on reusing the UCITS’s assets. Segregation covers depositary accounts for the UCITS, for other clients, and the depositary’s own accounts; all relevant custody risks along the chain are assessed and monitored.<\/p>\n Where custody is delegated (art. 15 of Regulation 2016\/438, art. 22a of Directive 2009\/65), there must be an objective reason to delegate; the depositary must ensure the third party has sufficient operational structures and expertise, an adequate level of protection against insolvency, a proper assessment of the legal and regulatory framework (country risk, custody risk, enforceability of contracts), correct segregation, and a contingency plan to repatriate the assets at any time; verifications must be initial and periodic. Services provided by a Central Securities Depository (CSD) at the highest level as a securities settlement system are not considered a delegation.<\/p>\n Finally, as to the depositary’s liability regime: the custody obligation for financial instruments is an obligation of result, entailing a restitution obligation in case of loss by the depositary or its delegates, the only discharge being force majeure (an external, unforeseeable, unavoidable event beyond the depositary’s reasonable control). The other obligations are obligations of means, but strictly assessed; any contractual arrangements with a third party cannot be relied on to reduce the depositary’s obligations.<\/p>\n This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" A short (non-exhaustive) overview of the depositary’s obligations under the UCITS V rules. Directive 2014\/91 (UCITS V) provides that the depositary’s liability cannot be contractually excluded or limited as regards the loss of instruments held in custody. The directive takes over the main measures of the AIFM directive, applicable to managers of alternative investment funds… Continue Reading →<\/a><\/p>\n","protected":false},"author":185562167,"featured_media":3495,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","advanced_seo_description":"The depositary of a UCITS bears three obligations under UCITS V: oversight, cashflow monitoring and safekeeping. 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Cashflow monitoring<\/h2>\n
3. Safekeeping<\/h2>\n