The new circular on UCITS depositaries has been released - Newsflash - 16/07/2014

The CSSF has yesterday released a new circular aimed at clarifying the provisions applicable to Luxembourg credit institutions acting as depositary for UCITS with more prescriptive and detailed rules to govern UCITS depositary functions.


In anticipation of the forthcoming directive of the European Parliament and of the Council amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to UCITS with respect to depositary functions, the CSSF has yesterday released a new circular aimed at clarifying the provisions applicable to Luxembourg credit institutions acting as depositary for UCITS (the “Circular”). Departing from a principle-based approach, the CSSF has enacted more prescriptive and detailed rules to govern UCITS depositary functions. Internal organisation of the UCITS depositary itself The objective of the Circular is to define new organisational requirements to be put in place at the level of the Luxembourg depositaries as well as at the level of the UCITS in terms of their role, duties and obligations concerning UCITS depositary functions. The current non-written requirements imposed by the CSSF in relation to the approval of a depositary have now been clearly stated in the Circular with specific rules in terms of heads of business lines, separation of conflicting functions from a hierarchical and functional perspective, adequate human and technical means to be put in place for example. Depositaries acting for UCITS will have to make sure that appropriate internal procedures as well as procedures or agreements with external entities they are working with are put in place. An exhaustive list of information set out in Appendix 2 of the Circular is to be communicated to the CSSF on a yearly basis, which will require an annual review thereof. Even the content of the written agreement appointing the depositary has been detailed on the basis of the requirements set forth in the AIFMD, but going a step further in relation to issues such as pledge provisions, right of reuse, netting and set-off. Role and duties of the UCITS depositary The Circular also aims at aligning to a large extent the role and duties of the UCITS depositary to the AIFMD depositary regime by adopting the same assets classification as the AIFMD, i.e. the financial instruments held in custody on the one side and the other assets for which the depositary has only an obligation to verify the ownership and keep an up-to-date inventory on the other side. A specific chapter has been dedicated to the treatment of cash, reinforcing its definition as a third category of assets, applying particular rules apart from the financial instruments and the other assets. Similarly to AIFMD, the oversight duties coming from the previous UCITS regime have now been harmonised and extended to all UCITS, without any distinction as to the legal form. What is expected from a UCITS depositary when carrying out its oversight duties is based on the AIFMD rules. Delegation of the UCITS depositary functions Very detailed rules have been set in relation to the due diligence process to be applied by a UCITS depositary in the case of the appointment of a sub-custodian or a third party-custodian. Areas such as the relationship with a fund distribution platform, a prime broker, a global sub-custodian, a collateral agent or a collateral manager have also been addressed by the Circular bringing more clarity with respect to the expectations of the Luxembourg regulator when UCITS have recourse to such intermediaries. The Circular also covers in greater detail the right of information and of intervention of the depositary towards the entities safekeeping the UCITS’s assets. Impact on existing depositaries and time to adapt Chapter E of Circular 91/75 will no longer be applicable to UCITS but will remain applicable to all funds which do not fall within the scope of AIFMD. Once the UCITS V Directive and the delegated acts in relation thereto are adopted later this year, the regime set forth in the Circular will be amended, notably to cover the liability regime which has not been included. Luxembourg credit institutions which currently act as depositary for UCITS have until 31 December 2015 at the latest to adapt their operational set-up and network of agreements to the new requirements of the CSSF. We have developed with Arendt Regulatory Solutions the Arendt Solutions for Depositaries to assist them in their compliance and due diligence processes. As part of the solution developed to help depositaries in their transition to the new UCITS regime, Arendt Institute provides specific training sessions and workshops to better understand the evolution of the depositary role and its responsibilities in the frame of the Circular.


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