04 October 2016

ALFI response to ESMA Call for evidence on asset segregation and custody services under AIFMD and UCITS

The Association of the Luxembourg Fund Industry (ALFI) wishes to reiterate that ALFI considers that segregation should not be an aim by itself but it is a way to enhance the protection of ‘custodiable’ financial instruments in case of insolvency of the depositary or its sub-custodians. This can be effectively achieved by using segregated accounts or omnibus account structure which are commonly recognised as an effective method of protecting end investors. 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.

ESMA’s policy goal of guaranteeing the protection of UCITS/AIF fund assets from the insolvency of a third-party delegate is sufficiently guaranteed via separate book-keeping in the accounts of the delegating depositary institution. Larger pools of securities in omnibus accounts would also facilitate the use of tri-party collateral management agreements, as well as broader market liquidity.

Therefore, ALFI is of the opinion that:

• the custodian chain model below the level of the depositary may vary and in many markets there is no choice. The model chosen should be the one that best protects client assets in accordance with local law and practice;
• the account holding structure in a given market is amongst others driven by a combination of local settlement and safekeeping practices;
• the primary concern for Depositaries is to ensure segregation of its clients’ assets (i.e. the assets owned by AIFs and UCITS it services) from the proprietary assets of the participants in the custodial chain;
• depositaries ensure that assets are identified through the custodial chain in a manner that best protects and ensures the speediest return of assets in the event of an insolvency.

As to the second key aspect of its response, ALFI would like to stress that it is not aware that additional segregation provides any additional legal protection in case of insolvency and even physically segregated individual accounts do not guarantee the return of assets in an insolvency scenario. ALFI is also not aware of any evidence regarding the assertion that subdivision of existing omnibus accounts by AIF, UCITS or depositary (or a combination of same) may expedite a return of assets. Furthermore, as noted above, additional segregation does not result in increased investor protection. In the case of a sub-custodian insolvency, there will be no legal or practical advantage for investors depending on whether assets are being held in segregated accounts by global custodian/depositary or in one comingled account for all global custodians/depositaries. The level of protection will be the same.

Moreover, ALFI is concerned by the uncertainty with regard to the treatment of CSD and the potential mismatch regarding liability standards between depositaries and their delegates on the one hand and, on the other hand, CSDs.

For the industry to operate on a level playing field, ALFI is of the view that clarifications need to be made to recognise the dual role CSDs can play as either “issuer” or “investor” CSDs. However, ALFI also notes that relying solely on the “issuer” CSD / “investor” CSD distinction might be problematic (please refer to our answer to question 29).

Full response

© ALFI - Association of the Luxembourg Fund Industry