Both the AIFMD and the UCITS Directive include requirements on depositaries and sub-custodians regarding the safe-keeping of fund assets. The current requirements are largely similar, but the co-legislators decided to apply an addition provision for UCITS relating to sub-custodians in third countries and applicable insolvency law, given that UCITS are marketed to retail investors. Both sets of current requirements include a provision requiring multiple omnibus accounts to be held at each level down the custody chain, which adds to operational costs but it is questionable whether it provides additional investor protection.
In the light of ESMA's work on the different approaches by national regulators, the Commission believes it necessary to amend both the AIF and UCITS rules. The Commission's intent seems to be to respond to the points highlighted by ESMA's work, but the drafting in various places is causing significant concerns for various industry players. Also, applying the UCITS rules relating to insolvency law also to AIF assets is not in line with the co-legislators' original intent and could restrict EU professional investors' access to investments in certain jurisdictions.
The current AIFMD Level 2 Regulation created an additional cost by requiring multiple omnibus accounts to be held at each level of the custody chain. It is debatable whether this provides any additional protection for investors. The requirements were subsequently incorporated into UCITS V. The Commission now proposes that this requirement be removed, which will be welcomed by many market participants. However, the Commission is proposing several other amendments, which work in the opposite direction:
A new section is added for AIFs (which already exists for UCITS) requiring the depositary to receive independent legal advice confirming that applicable insolvency law recognises various points and that the sub-custodian complies with any necessary conditions. This was not included in AIFMD precisely because it will cause significant issues in relation to investment into certain jurisdictions and in relation to the use of US brokers (which operate under a different legal framework).
To allow depositaries time to adapt to the new requirements, the Commission proposes that the new rules should be deferred until six months after publication of the Regulations in the EU's Official Journal. Given the very short consultation period and the general desire in both the European Parliament and Council to finalise as many proposals as possible before this parliament is dissolved, it is imperative that the industry actively and immediately engages with the legislators and national regulators.