On 16 April 2019, the European Parliament voted in favour to introduce a Directive and Regulation to amend existing regimes with the aim of improving cross-border distribution of AIFs and UCITS in the EU.
New EU legislation has been introduced amending the AIFMD and UCITS frameworks specifically in the area of safekeeping of assets by depositaries. This follows the publication of ESMA's Opinion in July 2017 outlining enhancements required to be made to the rules on safekeeping and segregation of assets held by depositaries and the practical application of the required segregation at the level of third party delegates.
Depositaries of UCITS and AIFs have until 1 April 2020 to comply with new rules on safekeeping duties following the publication of:
Commission Delegated Regulation (EU) 2018/1618 amending Delegated Regulation (EU) 231/2013 (the "AIFMD Delegated Regulation"); and Commission Delegated Regulation (EU) 2018/1619 amending Delegated Regulation (EU) 2016/438 (the "UCITS Delegated Regulation") (together the "Delegated Regulations"). Background
These new rules are in addition to existing safekeeping obligations. Divergent application by national competent authorities and market participants of existing safekeeping duties and a lack of harmonisation of EU securities and insolvency laws created the impetus for the Commission to prescribe these additional common rules.
The AIF Delegated Regulations bolster the existing rules by providing further clarity in relation to the safekeeping obligations of depositaries and any sub-delegates to whom safekeeping functions have been entrusted (i.e. custodians or prime brokers acting as custodians).
In particular, the changes prescribe new rules in relation to the identification of assets and their protection in the case of insolvency of the depositary. These enhancements include: Reconciliations Both the trading frequency of the depositary's client and the trades carried out by other clients, whose assets are held in the same omnibus financial instruments account, must be considered when determining the frequency of reconciliations between the depositary's internal accounts and records and those of the third party to which safekeeping functions have been delegated.
Recordkeeping Where the custody of assets has been delegated to a third party, records must be kept and maintained to enable the depositary:
At any time and without delay to distinguish assets of the depositary's clients...