On the 26th September 2014, the European Securities and Markets Authority (ESMA) issued a consultation paper on draft technical advice to the European Commission under UCITS V, relative to the draft implementing measures regarding the depositary role of UCITS funds.
UCITS V enhances the duties and liabilities of UCITS’ depositaries by clarifying the safekeeping, oversight and cash flow monitoring functions and prescribes the types of entity that may act as a depositary. ESMA’s consultation seeks stakeholders’ views on proposals in two areas related to the said depositary function:
Insolvency protection when delegating safekeeping
In order to ensure against the event of insolvency of a third party, UCITS V requires this third party to take all necessary steps to ensure that, in the event of its insolvency, the assets that it holds in custody are unavailable for insolvency distribution. ESMA’s proposals include steps to be taken by the third party including, but not limited to:
- verify that the applicable legal system recognises the segregation of the UCITS’ assets from those of the third party (which is not located in the EU) and that of the depositary;
- recognise that the UCITS’ segregated assets do not form part of the third party’s estate in case of insolvency and are unavailable for distribution among or realisation for the benefit of creditors of the third party (if the latter is not located in the EU);
- always maintain accurate and up-to-date records and accounts of UCITS’ assets that readily establish the precise nature, amount, location and ownership status of those assets;
- maintain appropriate arrangements to safeguard the UCITS’ rights in its assets and minimise the risk of loss and misuse.
UCITS V provides that both the UCITS’ management company (or the investment company, i.e. a self-managed UCITS) and its depositary need to act independently and solely in the interest of the fund and its investors. In order to fulfil the independence requirement, ESMA proposes a combination of measures based on i) the management/governance and ii) structural links.
The said consultation on the proposed measures regarding insolvency protection and independence of the UCITS depositary function closes on the 24th October 2014. ESMA is due to submit its technical advice to the European Commission by the end of November 2014.