ESMA consults on depositary requirements under UCITS V

26 September 2014

ESMA issued a consultation paper on draft technical advice to the European Commission under the revised Undertakings for Collective Investments in Transferable Securities Directive (UCITS V). ESMA is consulting on draft implementing measures regarding the depositary role of UCITS funds.

In order to enhance the protection of investors’ assets, UCITS V upgrades the duties and liabilities of UCITS’ depositaries by clarifying the safekeeping, oversight and cash flow monitoring functions. The new rules prescribe the types of entity that may act as a depositary. ESMA’s consultation seeks stakeholders’ views on proposals in two areas related to the 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, the following:

• 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.

Independence requirements: 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. These measures include the following ones:

Management/governance

• no member of the management body of the management company/investment company shall be a member/ employee of the management body of the depositary and vice-versa;

Two options are proposed for consultation. It is foreseen that EITHER

• the management company/investment company shall not have a direct or indirect holding in the depositary or vice-versa;
• the management company/investment company and the depositary shall not be included in the same group for the purposes of consolidated accounts;

OR

• in case (i) the management company/investment company has a direct or indirect holding in the depositary or vice-versa or (ii) the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts, the choice  of the depositary shall be justified to investors upon request;
• in case the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts, at least [one third] of the members of the management bodies of these entities shall be independent, in the sense that they shall not be members of the management body or the body in charge of the supervisory function nor employees of any of the undertakings within the group.

ESMA’s is seeking feedback on its proposed measures regarding insolvency protection and independence of the UCITS depositary function until 24 October 2014. ESMA will then use the feedback received to finalise its technical advice and submit it to the European Commission by the end of November 2014.

 

Press release

Full consultation paper

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