Depositary Bank compliance check

Your toolset to assess your depositary bank readiness to AIFMD and UCITS V

Following the 2008 global crisis, the EU has launched an avalanche of regulations impacting the fund industry. While the issuance of UCITS V is still pending, the industry gears up for AIFMD and a possible comprehensive UCITS depositary bank regulation in 2013. These texts will create an extensive set of requirements for depositaries, including their duties and liability.

Background

The ambivalence of the Luxembourg depositary’s roles (as an independent watchdog over the management company’activity, on the one hand, and as its service provider for certain delegated tasks, on the other hand) and the corresponding difficulty to strike the right balance between a fiduciary function enshrined in law and business and operational constraints met in practice, has always represented a real challenge.

The crisis-induced regulations, aimed to strengthen the monitoring activities of a funds’ value chain and to enhance the safety of processes within the industry, take this challenge a step further. The Alternative Investment Fund Managers Directive (AIFMD) and the current discussions around UCITS V will create the future regulatory and supervisory framework for non-UCITS and UCITS, respectively. The regulation known as EMIR (European Market Infrastructure Regulation) will reshape the OTC derivative market, in order to reduce counterparty risk and increase market transparency.

Overall, the conditions of safe-keeping of assets, the due diligence and supervision duties over sub-custodians, if any, and the monitoring of the fund’s operations will dramatically increase with these new regulations. Collateral management at depositary’s level will be overhauled. As a result, it is critical for depositaries to assess the potential gap right away, between their current operations and what they will need to do to face the new obligations. Most importantly, depositaries should reflect today on the new service offerings they will put in place for their fund clients.

A comprehensive approach to regulatory tasks and business functions

The new European rules are reshaping the way depositary banks have to fulfill their duties, and go deep into their processes and market infrastructure. While the classic « custody » function necessary to the operation of any kind of investment vehicle remains relatively untouched by the new regulations, the legal “depositary” function and the contents of the obligations of safekeeping, overseeing and now cash monitoring take an entirely new depth, as does the handling of a sub-custodian network.

Risk Dimension

In Luxembourg, the main duty of a depositary bank is and will remain the safekeeping of assets (for all regulated vehicles, UCITS, non-UCITS, SIFs and SICARs) and, depending on the type of fund, the administration of assets and all or some specific oversight obligations (over the NAV calculation, the issue/redemption of units, the timely settlement of assets, the income distribution and the investment compliance).

Safekeeping of funds’ assets will, for depositary banks acting for Alternative Investment Funds and, in the near future, for UCITS funds, mean enhanced obligations in terms of how to take in segregated custody financial instruments and how to verify and monitor ownership over certain other assets. The regulations strengthen the conditions for delegating safekeeping functions to sub-custodians or to any other entities/counterparties with which assets are deposited; the quality, selection and monitoring of such entities now become a core duty of the depositary bank, which may incur a liability if any of them defaults.

The liability regime of the depositary, now harmonised at EU level, goes away from the current “best efforts” basis used as regards the supervision of assets and creates a full liability in case of loss of instruments held in custody, with only few possibilities to discharge itself from it.

Value Chain Dimension

How we can help

PwC has designed a modular range of services which can be easily scaled to your specific needs.

PwC can establish a rapid diagnosis of your organisation against the key areas of compliance responsibility. The diagnosis will be made through a catalogue of approximately 100 specific questions/aspects, including both regulatory tasks and business functions. We will perform the analysis through interviews or reviews of selected documents. Focus will be put, in particular, on the following issues:

PwC can establish a rapid diagnosis of your organisation against the key areas of compliance responsibility.

What’s in it for you?

Our diagnosis include:

A presentation of Luxembourg regulatory requirements in terms of your roles, responsibilities and liabilities;
A business risk and opportunity roadmap which will highlight the regulatory areas and market standards your organisation already complies with, new opportunities provided by the new regulations and weak areas that might threaten the soundness of your future business conduct; and
A summary of recommendations and quick wins (optional).

Benefits to your organisation

Review of compliance with regulatory obligations;
Benchmark the organisation against market practice in/outside Luxembourg;
Roadmap the organisation identifying gaps or areas of vulnerability, new opportunities and expedience;
Identify and create internal awareness on business and compliance risks; and
Detect new business opportunity to be taken, identifying growth streams.

Why PwC Luxembourg

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with more than 2,100 people employed from 57 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach.