Two new regulations have been published amending the current Level 2 requirements on depositaries of Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investments in Transferable Securities (“UCITS”) schemes.
The amendments will take effect from 1 April 2020.
The changes brought about by the two new regulations apply to depositaries of AIFs and UCITS when delegating their safekeeping functions to a third party custodian. Whilst the regulations will not have a direct impact on AIF managers or UCITS managers, those managers will need to consider whether any changes are necessary to their existing depositary agreements to reflect the new obligations imposed.
The changes will apply to UK depositaries even in the event of a hard Brexit. By virtue of the European Union (Withdrawal) Act 2018, if there is no agreed deal with the EU and the UK, both the AIFMD and UCITS Level 2 Regulations will form part of UK law after the UK exits the EU.
At a high level, the changes involve reconciliations and contractual details.
With regard to reconciliations, the frequency of reconciliations is to be conducted as “often as necessary” and determined by reference to (i) the normal trading activity of the fund (AIF or UCITS); (ii) any trade occurring outside the normal trading activity; and (iii) any trade occurring on behalf of any other client whose assets are held by the third party in the same financial instruments account as the assets of the fund (AIF or UCITS).
Contractual details between depositaries and third party custodians are to be enhanced with guarantees inserted as to the provision of information and inspection and access to the sub-custodian’s records and accounts.
Commission Delegated Regulation (EU) 2018/1618 which amends the safekeeping provisions of Delegated Regulation (EU) No. 231/2013 (the AIFMD Level 2 Delegated Regulation).
Commission Delegated Regulation (EU) 2018/1619 which amends the safekeeping provisions Delegated Regulation (EU) 2016/438 (the UCITS Level 2 Delegated Regulation).