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Summaries of EU Legislation

Rules on the obligations of depositaries for EU investment funds

 

SUMMARY OF:

Delegated Regulation (EU) 2016/438 supplementing Directive 2009/65/EC with regard to obligations of depositaries

WHAT IS THE AIM OF THE REGULATION?

  • This delegated regulation sets out in detail the specific rights and obligations of depositaries* and management and investment companies under EU rules for undertakings for collective investment in transferable securities (UCITS)*.
  • In 2018, it was amended by Regulation (EU) 2018/1619 in regard to the safe-keeping duties of depositaries. This was due to a divergence in the level of protection for financial instruments held in custody by depositaries as a result of differing national and insolvency laws. The amendment primarily seeks to provide greater clarity and consistency in how assets are kept separated so that investors are better protected and to ensure more market efficiency.

KEY POINTS

Written contract

The depositary must have a written contract with the investment company or the management company for each of the common funds the latter manages. This must include details such as:

  • a description of the services to be provided and ways safekeeping, oversight and confidentiality obligations are to be exercised;
  • rules on the two-way transfer of information between the depositary and the management and investment companies, and with a third party;
  • procedures to prevent money laundering and the financing of terrorism, and to provide information when new cash accounts are opened;
  • confirmation the depositary may, through access to books and on-site visits, assess the conduct of the management or investment company and the quality of information it receives.

Regulation (EU) 2018/1619 sets out the minimum details that should feature in the contract between a depositary and a third party on delegation of custody of assets of the depositary’s UCITS clients.

Due diligence and oversight

The depositary must have in place procedures to:

  • assess, when it is appointed, the risks from the nature, scale and complexity of the UCITS’s investment policy and strategy;
  • devise, on the basis of that risk assessment, appropriate oversight, including checks and controls on the management or investment company;
  • ensure the sale and redemption of a UCITS assets tally and that proper procedures are in place to value those assets;
  • verify that instructions from the management or investment company are fully legal;
  • detect and inform the management or investment company when payments it is due are late;
  • check the accuracy of dividend payments;
  • monitor effectively a UCITS cash flow by, for instance, ensuring its money is in an account with a central bank or authorised credit institution;
  • receive from the management or investment company at the end of each business day details of payments made by or on behalf of investors;
  • ensure any UCITS financial instruments which it cannot physically hold itself are properly registered;
  • guarantee it has access without undue delay to all the information it needs from a management or investment company to carry out its various duties, such as verifying ownership and registering in its records any UCITS assets;
  • apply due diligence and ongoing monitoring when appointing another company to hold in custody the assets of its UCITS clients;
  • protect fully the assets of a UCITS client if their custodian in a non-EU country subsequently goes bankrupt.

Segregation obligation

The UCITS Directive requires that where a depositary delegates safekeeping functions to custodians, the assets also need to be segregated at the level of the delegate. Amending Regulation (EU) 2018/1619 specifies the manner in which this requirement should be met.

Liability discharge

Depositaries, if they have fully carried out their duties, are not liable for any loss in the following circumstances:

  • natural events beyond human control or influence;
  • adoption of any law, regulation or decree impacting on the assets they hold in custody;
  • war, riots or other major upheaval;
  • the UCITS never legally owned the financial instrument, was deprived of its ownership or is unable to dispose of it.

Independence:

The following rules apply:

  • No one may be simultaneously member or official of a management company and a depositary’s management board.
  • Limits exist on joint membership of management and supervisory boards for both partners.
  • Management or investment companies must use clear decision-making processes when choosing and appointing depositaries.

Conflicts of interest between management or investment companies and depositaries, including their management boards and supervisory functions, must be identified and avoided.

FROM WHEN DOES THE REGULATION APPLY?

The regulation has applied since 13 October 2016. The changes introduced to it by Delegated Regulation (EU) 2018/1619 apply from 1 April 2020.

BACKGROUND

For more information, see:

KEY TERMS

Depositaries: credit institutions (i.e. deposit-taking banks) or investment firms with regulatory permission to act as custodians of funds.
UCITS: investment vehicles that pool investors’ capital and invest that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities.

MAIN DOCUMENTS

Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 supplementing Directive 2009/65/EC of the European Parliament and of the Council with regard to obligations of depositaries (OJ L 78, 24.3.2016, pp. 11-30)

Commission Delegated Regulation (EU) 2018/1619 of 12 July 2018 amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries (OJ L 271, 30.10.2018, pp. 6-9)

RELATED DOCUMENTS

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, pp. 19-76)

Successive amendments to Directive 2013/34/EU have been incorporated into the original document. This consolidated version is of documentary value only.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338-436)

See consolidated version.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1-337)

See consolidated version.

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, pp. 32-96)

See consolidated version.

last update 08.04.2019

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