Spotlight on remaining post-AIFMD challenges for alternatives depositaries
Whilst depositaries for alternative investments funds may initially have been confined to their independent watchdog function introduced by the Alternative Investment Fund Managers Directive (AIFMD), the market has since significantly evolved and reshaped the way in which they fulfil their duties. The CSSF, in its circular 18/697, has formalised said established market practices and targeted further standardisation and alignment of depositary activities in the market.
To shed light on the recent developments, trends and challenges that define the alternatives depositary industry in Luxembourg, PwC Luxembourg invited depositary representatives to its inaugural Alternatives Roundtable held in November 2019.
A rebuttable presumption: “Look-through unless you can prove otherwise”
One area where the shift in market practices is particularly apparent compared to the early days of AIFMD is the application of the look-through principle.
Indeed, past discussions have primarily revolved around the notion of control, i.e. verifying whether the AIFM directly or indirectly controls the investment vehicle. During the event, roundtable participants did not only confirm the market’s increased comfort in interpreting the look-through principle and control test but further acknowledged the need to go beyond its strict application in order to effectively perform their operational duties and ensure investor protection. Practical insights include:
- Depositaries would look through to underlying investments held via non-controlled vehicles given the scope described in the investment policy or PPM as well as the risk of fraudulent cash flows disappearing in the structure
- Instances where depositaries do not look through are generally limited, for example assets in the safekeeping of another depositary (subject to equivalence of the depositary regime)
Gearing up for operational efficiency and digitalisation
In response to the ever-growing volume, complexity and geographical footprint of their activities, strategic priorities of depositaries have evolved from ensuring compliance of their operating model with regulatory requirements to scaling their operations in a cost-efficient manner. In this context, depositaries recognize substantial opportunities around:
- Improving operational efficiency associated with the execution of depositary duties, notably in the context of safekeeping and oversight.
- Fostering effective collaboration and information sharing with other parties, including auditors and fund administrators to reduce the duplication of tasks.
- Further digitalising operations (via the introduction of workflow management, reporting, asset recordkeeping and/or document management tools) as well as automating repetitive and voluminous tasks.
- Managing data in a secure and centralised environment.
Conclusion
As a crucial pillar in ensuring investor protection, depositaries have embraced regulatory challenges and made considerable efforts to establish a strong market practice in Luxembourg. Looking forward, they are equally keen to tackle upcoming challenges and opportunities - in particular in relation to scalability and digitalisation - thereby further contributing to an attractive service offering for alternative investment funds in Luxembourg.
