Non eu aif depositary relationship

Considerations when selecting a depositary to an AIF | Hedgeweek

non eu aif depositary relationship

the AIFMD took effect in national law across the European Union. In general, an A depositary is not required in relation to non-EEA AIFs that are: • managed by . This is made slightly easier in the sense that the AIFM of a non-EU AIF selecting the depositary because it makes the relationship easier to. in Article 21(7)-(9) of the AIFMD in respect of non-EU AIF as set out in Article 36 . depositary regime except in relation to depositary liability.

Cost versus risk profile The cost of the depositary ultimately comes down to the risk profile of the AIF. This means that the depositary has to conduct a robust risk assessment of the AIF if the AIFM chooses to continue using an existing prime broker and administrator.

non eu aif depositary relationship

Alternatively, by using an integrated model, a lot of the risk can be internalised and the cost impact to the manager is reduced. In this arrangement, a single counterparty acts as the administrator and depositary to carry out the cash monitoring, safekeeping and oversight functions.

It can be highly frustrating when waiting for information from an external 3rd Party, especially as our services have been tailored to ensure compliance with depositary functions under AIFMD and in a way that minimises disruption to the AIFM. Consequently, we do offer Depositary as a stand-alone service and are confident that over time we will prove to be the preferred partner to our clients in other areas; for example, fund administration services, where we are number one in Europe with EUR1.

Nevertheless, there are clear signs that more PERE fund managers and hedge fund groups are exploring the benefits of launching regulated funds — AIFs and UCITS for liquid hedge fund strategies — and getting more comfortable with the role that the depositary plays.

We have seen our assets under depositary increase phenomenally to over EURbn. It is self evident that AIFMD is responsible for a sharp increase in demand for depositaries and the growth of Private Equity and Real Estate funds has also contributed to this requirement," adds Dunne. With respect to the oversight function, the last thing any fund manager wants is the depositary interfering unnecessarily in the way they run their fund.

Deutsche Bank makes a point of focusing on taking time at the outset of a client relationship to understand the client, the fund structure, policies and investment mandate.

We strike the right level of interaction with the manager and raise only true issues that are identified as part of oversight reviews.

Key considerations when appointing the depositary Finding the right fit is vital for the AIFM when looking for a depositary.

non eu aif depositary relationship

Having a depositary with a sound balance sheet and good technology is an equally important selection criterion for AIFMs and their investors. However, specific aspects will typically require additional elaboration. For example, the requirement to state the procedures to be adopted for each type of asset 16 and the description of the manner in which the oversight function is to be performed depending on asset type and the relevant geographical region of the investment Accordingly, depositaries will be obliged to revise their standard contracts and range of services to observe their increased obligations under the AIFMD, as well as the applicable liability standard.

Considerations when selecting a depositary to an AIF

Existing EU AIFs with depositaries will need to amend their contracts to ensure compliance with this new regulatory environment and AIFMs which fall under the scope of the Directive will need to ensure appropriate new contractual arrangements are put in place. For larger non-EU managers this may mean that the presence of a local custody industry would be a key consideration when determining where to situate their European distribution operation.

Depositaries located in non-EU countries will only be acceptable for the purposes of the AIFMD where the entity itself meets the relevant criteria, by being subject to effective regulation 25 and contractual obligations 26 similar to those applicable to EU depositaries for example, and the country in which it is located meets the relevant criteria set out in the AIFMD by virtue of the existence of a co-operation agreement between its competent authorities with those of the relevant EU Member States 27 and the fact that it is not listed by FATF as a non-cooperative Country and Territory 28for example.

Detailed criteria for assessing whether the level of prudential regulation and supervision of a depositary in a third country is adequate for the purposes of the AIFMD are included in the Regulation These conditions also include requirements relating to base capital, legal obligations and applicable operating conditions of the depositary. Although the appointment of a third party depositary to non-EU AIFs is not currently prevalent, the appointment of prime brokers is very common.

Accordingly it is worth noting that the AIFMD provides that, in order to avoid conflicts of interest, a prime broker would be prohibited from acting as depositary to an AIF to which it has been appointed unless it has functionally and hierarchically separated the performance of its depositary functions from its tasks as prime broker and the potential conflicts of interest are properly identified, managed, monitored and disclosed.

This may prompt prime brokers to restructure their operations to ensure that they can meet these requirements or to reconfigure the nature of their contractual relationship with the AIF so that they only act as counterparties. Where prime brokers are appointed they are subject to specific reporting obligations to the depositary under the AIFMD These include general overriding obligations as well as more specific duties related to their functional role.

  • The Alternative Investment Fund Managers Directive—2016 Update

On the other hand, specific functional duties include: These duties have been elaborated upon in the Level 2 Regulations to give further specific practical guidance on what is required to comply with the applicable obligations 36in particular with respect to types of financial instruments to be held subject to custody duties, the potential use of a central depositary and instruments issued in nominative form.

This means that while amendments will typically be required to the custody agreements applicable to existing Irish non-UCITS, such as QIFs, once the AIFMD becomes effective and while this will result in amendments to the existing arrangements and practices of Irish custodians, these will generally not involve an unduly extensive level of additional work. It also means that Irish based custodians are ideally equipped to service non-Irish AIFs appointing depositaries for the first time, where they can satisfy the necessary criteria for the location of the relevant depositary It can be noted that the primary additional duties include the specific new obligations regarding the requirements on the depositary with regard to cash monitoring including opening of accounts and ensuring all subscription payments have in fact been received.

The AIF Rulebook also specifically details the tasks 38 and operating conditions 39 applicable to depositaries in Ireland. Among these are a specific obligation to notify the Central Bank of any material breach of applicable legislation including the AIFMD 40to ensure that it does not have directors in common with the board of an AIFM it provides services to 41 and to decline to permit performance fees to be paid until these have been verified by the depositary or an entity it has approved Delegation The AIFMD prohibits delegation by a depositary of its duties, except those relating to safe-keeping or verification of ownership of assets In practice this permits the establishment of an effective sub-custody network while ensuring that the duly appointed depositary does retain primary responsibility and liability 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.

The Role of the Depositary under the AIFMD

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. 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.