The UCITS V Directive (UCITS V) provides for several empowerments for the European Commission (the Commission) to adopt delegated acts relating to the new depositary requirements.
Such requirements are meant to broadly align the provisions of the UCITS Directive with those of the Alternative Investment Fund Managers Directive (AIFMD) in terms of rules on depositaries’ duties, delegation, eligibility to act as custodian and liability. In addition, UCITS V includes two empowerments to adopt delegated acts that are not covered by the AIFMD depositary rules. These relate to provisions concerning: (i) the insolvency protection of UCITS assets when the depositary delegates safekeeping duties to a third party; and (ii) the requirement for the management company and depositary to act independently.
In July the Commission issued a provisional request for technical advice from the European Securities and Markets Authority (ESMA) on the two empowerments not covered by the AIFMD depositary rules. The Commission asked for ESMA to deliver its technical advice by 15 October 2014. In light of this tight deadline, ESMA moved quickly to engage with key stakeholders which included a roundtable on 29 July 2014. ESMA has now followed up its stakeholder engagement by publishing a consultation paper which sets out its draft technical advice on the two empowerments.
Section 3 of the consultation paper covers draft advice on the insolvency protection of UCITS assets when delegating safekeeping. UCITS V provides that, when the custody functions are delegated by the depositary to a third party, such a third party shall take “all necessary steps to ensure that in the event of insolvency of the third party, assets of a UCITS held by the third party in custody are unavailable for distribution among or realisation for the benefit of creditors of the third party.” The Commission is empowered to adopt delegated acts specifying the steps to be taken by the third party pursuant to these provisions. The consultation paper proposes measures, arrangements and tasks for the third party to which custody is delegated as well as measures to be put in place by the depositary.
Section 4 of the consultation paper covers draft advice on the independence requirement. UCITS V states that “In carrying out their respective functions, the management company [and the investment company] and the depositary shall act […] independently and solely in the interest of the UCITS and the investors of the UCITS.” The Commission is empowered to adopt delegated acts specifying the conditions for fulfilling this independence requirement. The consultation paper identifies two types of link between the management company/investment company and the depositary which may jeopardise their independence. These are: (i) common management/supervision; and (ii) the cross-shareholdings between these entities.
In order to organise a public consultation on the draft technical advice, in line with ESMA consultation practices, ESMA will deliver its technical advice after the deadline set by the Commission. It is expected that the final advice will be sent to the Commission by the end of November 2014.
The deadline for comments on the consultation paper is 24 October 2014.
View ESMA consults on depositary requirements under UCITS V, 26 September 2014