The Alternative Investment Fund Managers Directive (AIFMD) has introduced a new per se, the differences in the organizational set-up of depositaries. An AIFM that is fully authorised under the Directive is required to appoint a single . or AIFM, and the depositary in relation to the sale, subscription, redemption. Is it compliant with the AIFMD if a Luxembourg management company Can the depositary be the same entity charged with the risk management . in relation to shares or units of collective investment undertakings; (iii) reception and.
This de-coupled model is where a firm like Deutsche Bank provides everything from prime brokerage, fund administration, depository, cash management, investor reporting and investor services: One of the major benefits to managers who use the integrated model is cost.
As mentioned earlier, the onshore depository will be on the hook for any liabilities suffered in the AIF as a result of asset misappropriation.
This means that the depository will have to conduct a robust risk assessment of the AIF if the AIFM chooses to continue using multiple prime brokers and the cost impact to the manager will be higher. Where external prime brokers are being used we need to determine: Which legal entity is involved? What markets are they trading? What is the registration process in the underlying market? In the fully integrated model the risk premium will be lower compared to the de-coupled model.
When asked whether Deutsche Bank would ever refuse to support a manager if the perceived risks being taken in the AIF were too high, Hughes replies: In such a scenario we might not be able to provide depository services for those specific markets. It comes down to: That will determine the yes or no decision tree. The open architecture model At UBS Fund Services, the integrated model is fully supported to those AIFMs who would prefer to go that route but such a model will not necessarily be in the best interests of managers of a certain size who will benefit more from an open architecture model, says Byrnes.
In his view, it makes sense to allow the manager to continue with the existing prime brokerage relationships, provided of course the prime brokers are supported on the UBS platform. The open architecture approach is considered by UBS to be a more cost-effective framework to implement.
The Role of the Depositary under the AIFMD
Where that is not possible we will have an indemnification model in place with the relevant prime broker. Whether a manager chooses the integrated model or the open architecture model will largely depend on their size, whether they are a new or existing manager and the extent to which they use prime brokers.
One issue that managers were initially concerned about was how the appointment of a depository under AIFMD might impact their prime brokerage relationships.
This though is very much a ship that has sailed thanks to the sub-custodial agreements for discharge of liability that are busy being put in place. What is of more concern is making sure that their depository will actually support their preferred prime broker s.
With respect to the oversight of other assets i. We just want to make sure that in our role as the depository we can put a framework in place that addresses the requirements of Article 21 under the directive and that we can agree a framework with the prime brokers.
If the AIFM has an existing relationship with a prime broker s and they wish to have SMT Trustees consider their appointment as a sub-custodian we will of course undertake due diligence etc but as we already have many prime brokers appointed as sub-custodians its also likely to be a faster process.
Understanding the role of the depository under AIFMD
In addition delegation, to the limited extent that it is permitted, is subject to a series of conditions. These include that there is an objective reason for the delegation and that it is not being appointed in a bid to avoid the requirements of the AIFMD.
The depositary must exercise skill, care and diligence in both the initial selection of delegates and also their periodic review and on-going monitoring.
This involves an on-going obligation to ensure that the delegate complies with the applicable requirements, which include that it be regulated, have adequate structures and expertise, ensure assets are segregated and undertake to comply with the general requirements applicable to the depositary Depositaries will accordingly be obliged to undertake a thorough due diligence on their network of sub-custodians to ensure that they meet the relevant requirements and in addition they will be obliged to put in place an effective system for on-going monitoring and review to maintain compliance.
The Regulation includes a series of steps to be carried out at a minimum in order for a depositary to be deemed to have satisfied its obligations in this regard Assets belonging to an AIF may not be excluded from the scope of the custody obligation where they are subject to particular business transactions such as collateral arrangements.
In order to meet these requirements a number of practical solutions are possible under the AIFMD, for example: While each of these potential solutions would be possible, clearly ensuring compliance under the AIFMD would entail various challenges in each scenario.
Understanding the role of the depository under AIFMD | Hedgeweek
This will be particularly the case where the AIF wishes to avail of prime brokerage services. While, as noted above, prime brokers may be appointed as depositaries subject to the applicable requirements, it is likely that in practice their role will generally instead involve either 1 a contractual relationship with a separate depositary whereby the prime broker will act as a sub-custodian or otherwise as part of the custody network of the depositary, or alternatively 2 the prime broker will be entirely outside this network and effectively act as the counterparty to the AIF.
The former models are further complicated by the relevant liability provisions, discussed below, which may lead the depositary to either seek an indemnity from the prime broker or to ensure that the arrangement is structured in the necessary manner to discharge it from liability under the AIFMD Liability The AIFMD specifies a strict standard of liability for depositaries to AIFs or their investors for instruments held in custody by them and provides that they will be liable for the negligent or intentional failure to properly fulfil their obligations Furthermore, it provides that the liability of a depositary shall not be affected by any delegation of its functions However, where a delegate is responsible for the loss of a financial instrument the depositary can avoid any liability where it has put in place the delegation in accordance with the relevant requirements; the terms appointing the depositary provide for the potential for it to discharge its liability in such a scenario; and where the terms of the delegation agreement expressly provide for the transfer of liability to the delegate while making it possible for the AIF or the AIFM or the depositary itself, in either case acting on its behalf, to make a claim against the delegate It can be noted that the doctrine of privity of contract, which provides that a party which is not a party to a contract may not act upon it, applies in Ireland.
In practice therefore it may be useful to join either the AIFM or the AIF as parties to delegation agreements if an Irish depositary is to take advantage of this potential to avoid liability for its delegates yet minimise potential involvement in litigation. The following section is also relevant in this regard: It remains to be seen which non-EU jurisdictions will be able to enter into appropriate co-operation arrangements as required and a common framework will be adopted to facilitate the establishment of such co-operation arrangements However, in such circumstances the AIFM shall still be subject to an obligation to ensure that a third party i.
The role of the depositary under the AIFM Directive
These required services include monitoring cash flows 60safe-keeping 61 and general oversight This will depend upon both the terms of the authorisation of such service providers and the local legislation to which they are subject, as well as the adoption and interpretation of these provisions in the local law of the Member State.
The Regulation will not require any transposition into Member State law once approved as it will be directly applicable. It can be noted that the Central Bank announced that it would begin accepting applications from AIFMs on 15 Maythe first European jurisdiction to do so, in order to ensure that AIFMs which wished to avail of the new marketing passport would be able to do so without delay.
The large body of custodian banks which are already well-established in Ireland have a wealth of experience in delivering relevant solutions while subject to duties which are to a significant degree similar to those imposed by the AIFMD. This means that, as a jurisdiction, Ireland is ideally placed to take advantage of the requirement for a depositary to be located in the same jurisdiction as any EU AIF to which it is providing services.
It is anticipated that Ireland, which is already the leading European domicile for alternative funds, will see significantly increased growth in this sector in the coming years as international investment managers seek to take advantage of the new pan-European passport which will become available to AIFs under the AIFMD. Mark practised as an Attorney-at-Law specialising in hedge funds in the funds practice of a leading firm in the Cayman Islands for four years and advises on the redomiciliation of offshore funds to Ireland.
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