Key Differences with UCITS IV and Similarities with AIFMD

 

The undertakings for the collective investment in transferable securities (UCITS) are investments funds regulated in the European Union (EU) Member States. On the 23rd July 2014, the EU adopted Directive 2014/91/EU on the coordination of laws, regulations and administrative provisions relating to UCITS as regards depositary functions, remuneration policies and sanctions. The Directive was published on 28th August 2014 and all EU Member States has until 18 March 2016 to transpose the directive into national law. The aim of the Directive is to increase the level of protection already offered to investors in UCITS funds, improve investors confidence and more importantly to harmonize the depositary functions across EU Member States.

 

This article focuses on the new depositary functions highlighting key differences with UCITS IV and similarities with AIFMD regime. Also touches on key implementation challenges facing depositary.

 

 

Key Provisions UCITS IV AIFMD UCITS V Potential Gaps
Appointment of a single depositary No requirement for a single depositary to hold assets  of UCITS Requires the appointment of a single depositary for each Fund Similar to AIFMD A detail analysis of current UCITS structures under management is required and where there are multiple depositaries, negotiation to appoint a single depositary will require significant amount of effort.For examples

  • Aligning UCITS documentation with AIFMD and compliance procedures.
Depositary Liability Unjustifiable failure to perform to its obligations or its improper performance of its duties. Liability regime is similar to UCITS V but differ in the sense that liability can be discharged in certain circumstances where safekeeping agent is appointed. Introduce strict liability rules. The depositary is liable to the UCITS and its investors of any loss of assets under its custody and its delegates unless it can proof that loss arose as a result of external event(s) beyond its control. The introduction of strict liability rule requires depositary to enhance due diligence, improve operational controls around safekeeping of assets, develop or improve technology to ensure assets of UCITS are safely kept.  This effort to reduce exposure to increase in investors claim against depositary will require significant cost.
Written Contract Required but less detail More detailed requirements. Evidence of signed written contract appointing a depositary is required. Similar to AIFMD. This additional requirement has significant implications as depositary agreement need to be amended to cover new depositary functions. i.e. re-papering all existing UCITS clients.This is a one off cost and could be easily be absorbed by the depositary without transferring cost to UCITS.
Cash Monitoring This function is not addressed in UCITS IV Set out detail cash flow monitoring obligations. Similar to AIFMD.The depositaries is responsible for the proper monitoring of the cash flows of the UCITS, and in particular ensure that investors money and cash belonging to UCITS is booked correctly in the name of the UCITS or its management company. Implementing cash monitoring requirements has significant operational challenge for the depositary.  Whilst the same preparation has been done under AIFMD, the volume of work, FTE and technology impact is by no means the same.
Safekeeping of Assets Less detail than UCITS V and AIFMD The assets of the AIF or the AIFM acting on behalf of AIF shall be entrusted to the depositary for safekeeping. UCITS V provided more detailed requirements in an attempt to ensure harmonisation of asset keeping across EU Member States. (More detail in the Level 2 Requirements) It is early to determine the full scope of operational impact of safekeeping of assets until the Level 2 requirements is published.  Though it is anticipated that segregation of assets and regular asset inventory reporting to the Management Company will be required.

The above requires changes to operational processes and will require additional resources and technology changes in order to cope.

Verification and Record Keeping No duty to verify ownership or record keep Other Assets Requires the depositary to verify fund’s ownership of Other Assets (i.e. those other than financial instruments) and maintain an up to date record of them. Same as AIFMD. For UCITS, this will relate almost wholly to derivatives. This will require significant enhancements to record keeping systems and reconciliation processes.
Enhanced Oversight Process 5 core oversight duties No change to 5 core duties but more prescriptive as to depth and frequency of checks to be performed. Same as AIFMD. Impact is significantly higher for UCITS due to daily NAVs and daily subscriptions and redemptions.

 

Key Milestones

 

  • 23rd July 2014                EU Council adopted Directive 2014/91/EU

 

  • 28 August 2014               Directive Text published in the Official Journal of the EU

 

  • 28 November 2014         ESMA Technical Standards and Guideline

 

  • End of Q4 2015               Publication of Level II Regulations expected
  •  18 March 2016               EU Member States transpose Directive into National Law

 

Implementation Consideration

The uncertainty surrounding when Level II Regulations would be published posed a significant disruption to implementation planning. If regulations are released at the end of Q2 2015, this leaves two and half months of implementation period. This situation will leave many depositaries not fully ready by the deadline date. Our advice is that firms should leverage on the experience learned during AIFMD implementation particularly around asset segregation

 

Gradient Consulting is available to provide assistance on preparing gap analysis and implementation of UCITS V Depositary Functions.

 

 

Ajibade Yusuf (BA Hons, FCCA, MBA)

Senior Consultant – Gradient Consulting

ajibadey@hotmail.com

+352 661 149 707

+44 777 263 8031

 

 

Disclaimer

The contents of this article are for general information purposes only and are intended to raise awareness of certain issues. The commentary is not a substitute for proper advice; appropriate legal advice should be sought. It may be not be quoted or referred to in any other publication or proceeding without the prior written consent of the Company. The views set forth herein are the personal views of the author and do not necessarily reflect those of the Company