01 February 2015

ALFI responded to consultation on asset segregation under the AIFMD

In ALFI’s view, segregation requirements should be focused on the protection of customer assets from events effecting the depositaries and the delegates own assets throughout the custody chain. A differentiated level of segregation according to the status of the third party as delegate (Level 1) or as sub-delegate (Level 2) makes much sense and provides efficient protection. Accordingly, the depositary should ensure that 1) delegates maintain segregation of assets between the “proprietary assets” of these delegates, “proprietary assets” of the depositary, the AIFs and non-AIFs assets of the depositary and the assets of other customers of the depositary which are not AIFs and non-AIFs assets and 2) sub-delegates maintain segregation between its proprietary assets and customer assets.

Segregation between a depositary’s proprietary assets and its customer’s assets by way of separate accounts as well as at the levels below between delegate’s proprietary assets, depositary’s proprietary assets and customer assets is generally regarded as an efficient way of protecting the customer’s assets against depositary and/or delegate insolvency. This can be effectively achieved by using segregated accounts and/or omnibus structures which are commonly recognised as an effective method of protecting end investor’s interests. Segregation that goes beyond the separation between proprietary assets and customer assets does not necessarily provide better protection of investor’s assets. In case of e.g. an insolvency of a sub-custodian, the depositary will seek to retrieve all assets in an omnibus account by way of one instruction as opposed to the need of sending a multitude of instructions (which may create associated risk) to retrieve assets from a multitude of accounts.

Segregation between AIF and non-AIF assets by way of separate accounts does not provide greater protection of investor’s assets, rather such level of segregation requires the set-up and maintenance of multiple accounts with associated costly controls and reconciliation risks.

Full ALFI response

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