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FUND 3.11 Depositaries

Application

FUND 3.11.1R

This section applies in accordance with the table in FUND 3.11.2 R and FUND 3.11.3 R.

FUND 3.11.2R

This table belongs to FUND 3.11.1 R.

Rule

Full-scope UK AIFM of a UK AIF or an EEA AIF (other than a non-EEA feeder AIF which is marketed in the UK)3

Full-scope UK AIFM of a non-EEA AIF or a non-EEA feeder AIF3 which is marketed in the UK

UK depositary of a UK AIF (other than a non-EEA feeder AIF which is marketed in the UK)3 managed by a full-scope UK AIFM or an EEA AIFM

UK depositary of a non-EEA AIF or a non-EEA feeder AIF which is marketed in the UK3

3.11.4R

x

3.11.5R

x

x

3.11.7R

x

3.11.9R

x

3.11.10R

x

3.11.12R

x

3.11.14R

x

3.11.16R

x

3.11.18R

x

3.11.19R

x

x

3.11.20R

x

x

3.11.21R

x

x

3.11.23R

x

x

3.11.24R

x

3.11.25R

x

x

3.11.26R

x

3.11.28R

x

3.11.29R

x

3.11.30R

x

3.11.33R

x

Note: "x" means "applies".

FUND 3.11.3R

A UK depositary of a non-EEA AIF or a non-EEA feeder AIF which is marketed in the UK3 that does not perform all of the functions of cash monitoring, safekeeping and oversight for the AIF need only comply with the following rules that are applicable to the functions it performs:

  1. (1)

    FUND 3.11.20 R if it performs only the cash monitoring function;

  2. (2)

    FUND 3.11.21 R and FUND 3.11.23 R if it performs only the safekeeping function;

  3. (3)

    FUND 3.11.25 R if it performs only the oversight function;

  4. (4)

    FUND 3.11.20 R, FUND 3.11.21 R and FUND 3.11.23 R if it performs only the cash monitoring and safekeeping functions;

  5. (5)

    FUND 3.11.20 R and FUND 3.11.25 R if it performs only the cash monitoring and oversight functions; and

  6. (6)

    FUND 3.11.21 R, FUND 3.11.23 R and FUND 3.11.25 R if it performs only the safekeeping and oversight functions.

Appointment of a single depositary

FUND 3.11.4R

An AIFM must, for each AIF it manages, ensure that:

  1. (1)

    a single depositary is appointed; and

  2. (2)

    the assets of the AIF are entrusted to the depositary for safekeeping in accordance with

    1. (a)

      for a UK AIF, FUND 3.11.21 R and FUND 3.11.23 R; or2

    2. (b)

      for an EEA AIF, the national laws and regulations in the Home State of the AIF implementing article 21(8) of AIFMD.2

[Note: article 21(1) and (8) of AIFMD]

General obligations

FUND 3.11.5R

An AIFM and a depositary must, in the context of their respective roles, act honestly, fairly, professionally, independently and in the interest of the AIF and its investors.

[Note: article 21(10) first paragraph of AIFMD]

FUND 3.11.6G

The Act specifies that the trustee of an AUT and the depositary of an ACS must be independent of its authorised fund manager, and the OEIC Regulations specify that the depositary of an ICVC must be independent of the ICVC and its directors. However, these requirements do not apply to AIFs which are not authorised funds, and, therefore, an AIFM and a depositary of an unauthorised AIF may be from within the same group, but only if conflicts of interest are avoided and there is sufficient organisational separation between the two entities.

Conflicts of interest: AIFM

FUND 3.11.7R

To avoid conflicts of interest between the depositary, the AIFM, the AIF and its investors, an AIFM must ensure that:

  1. (1)

    it does not act as a depositary or a delegate of a depositary; and

  2. (2)

    a prime brokerage firm acting as counterparty to an AIF does not act as the depositary for that AIF, unless:

    1. (a)

      the prime brokerage firm has functionally and hierarchically separated the performance of its depositary functions from its tasks as a prime brokerage firm; and

    2. (b)

      potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF by the AIFM.

[Note: article 21(4) of AIFMD]

FUND 3.11.8G

A depositary may delegate custody tasks to one or more prime brokerage firms provided the depositary complies with FUND 3.11.26 R to FUND 3.11.30 R. In addition to the delegated custody tasks, prime brokerage firms are allowed to provide prime brokerage services to the AIF. Those prime brokerage services do not form part of the delegation arrangement.

[Note: recital 43 of AIFMD]

Conflicts of interest: depositaries

FUND 3.11.9R

A depositary must not carry out activities with regard to the AIF, or the AIFM on behalf of the AIF, that may create conflicts of interest between the AIF, the investors in the AIF, the AIFM and itself, unless:

  1. (1)

    the depositary has properly identified any such potential conflicts of interest;

  2. (2)

    the depositary has functionally and hierarchically separated the performance of its depositary tasks from its other potentially conflicting tasks; and

  3. (3)

    the potential conflicts of interest are properly managed, monitored and disclosed to the investors of the AIF.

[Note: article 21(10) second paragraph of AIFMD]

Eligible depositaries for UK AIFs

FUND 3.11.10R

Subject to FUND 3.11.12 R, an AIFM must, for each UK AIF it manages, ensure the appointment of a depositary which is a firm established in the UK and which is one of the following:

  1. (1)

    a credit institution; or

  2. (2)

    a MiFID investment firm which:

    1. (a)

      has own funds of not less than €730,000; and

    2. (b)

      provides the ancillary service of safe-keeping and administration of financial instruments for the account of clients; or

  3. (3)

    another category of institution that is subject to prudential regulation and ongoing supervision and which, on 21 July 2011, fell within the categories of institution eligible to be a trustee of an AUT or a depositary of an ICVC.

[Note: article 21(3)(a) to (c) and (5)(a) of AIFMD]

FUND 3.11.11G

For a depositary to be established in the UK it must have its registered office or branch in the UK. A MiFID investment firm that has its registered office in the UK must be afull-scope IFPRU investment firm1 to meet the requirements of FUND 3.11.10R (2). A MiFID investment firm that has a branch in the UK must meet the capital requirements under the EU CRR for1aCRD full-scope firm as implemented1 in its Home State to meet the requirements of FUND 3.11.10R (2).

11111
FUND 3.11.12R

An AIFM that manages a UK AIF which:

  1. (1)

    has no redemption rights exercisable during the period of five years from the date of the initial investments; and

  2. (2)

    in accordance with its core investment policy:

    1. (a)

      does not generally invest in AIF custodial assets; or

    2. (b)

      generally invests in issuers or non-listed companies in order to potentially acquire control over such companies in accordance with regulation 35 of the AIFMD UK regulation

may appoint, as its depositary, a firm which is established in the UK and which complies with FUND 3.11.14 R.

FUND 3.11.13G

For the purposes of FUND 3.11.12R (2)(a), an AIF does not generally invest in AIF custodial assets if it invests in such assets on a temporary basis or if those assets do not constitute a significant proportion of its overall assets. However, in line with FUND 3.11.12R (2)(b), an AIF may invest in AIF custodial assets if it invests in issuers to acquire control of such companies in accordance with regulation 35 of the AIFMD UK regulation or if it is in the process of divesting its investment in an issuer which it controls or previously controlled.

FUND 3.11.14R

An AIFM must ensure that a depositary appointed in line with FUND 3.11.12 R is a firm:

  1. (1)

    which has the Part 4A permission of acting as trustee or depositary of an AIF; and

  2. (2)

    which has own funds of at least €125,000.

[Note: article 21(3) second paragraph after (c) and (5)(a) of AIFMD]

FUND 3.11.15G

For certain types of closed-ended AIFs (such as private equity, venture capital and real estate funds) a wider range of entities than those specified in FUND 3.11.10 R may perform the relevant depositary functions. The FCA requires such entities to obtain authorisation as a depositary to demonstrate that they can meet the commitments inherent in those functions, but imposes a lower level of capital requirements in recognition of the different degree of risk implied by the characteristics of the AIF. The capital requirements of such firms are contained in IPRU-INV 5 (particularly IPRU-INV 5.4.3R5 (Own funds requirement))but1 if the firm also 1undertakes MiFID business, its capital requirements will be contained in IFPRU and the EU CRR or in GENPRU and BIPRU depending on the scope of that MiFID business1.

[Note: recital 34 of AIFMD]

1

Additional requirements for depositaries of authorised AIFs

FUND 3.11.16R

A MiFID investment firm (other than a PRA-authorised person) which is appointed as a depositary for an authorised AIF in accordance with FUND 3.11.10R (2) must maintain own funds of at least £4 million.

FUND 3.11.17G

Where the firm referred to in FUND 3.11.16 R is afull-scope IFPRU investment firm1 which is a depositary for an authorised AIF appointed in line with FUND 3.11.10R (2), it is subject to the capital requirements of IFPRU and the EU CRR1. However, these requirements are not in addition to FUND 3.11.16 R and, therefore, a firm subject to this rule may use the own funds required under IFPRU and the EU CRR1 to meet the £4 million requirement.

111

Eligible depositaries for EEA AIFs

FUND 3.11.18R

An AIFM must, for each EEA AIF it manages, ensure the appointment of a depositary which is established in the Home State of the AIF and which is eligible to be a depositary in that Home State in accordance with article 21(3) of AIFMD.

[Note: article 21(3) and (5)(a) of AIFMD]

Written contract

FUND 3.11.19R

An AIFM and a depositary must ensure that the appointment of the depositary is evidenced by a written contract. The contract must regulate the flow of information deemed necessary to allow the depositary to perform its functions for the AIF for which it has been appointed as depositary.

[Note: article 21(2) of AIFMD]

Depositary functions: cash monitoring

FUND 3.11.20R

A depositary must ensure that the AIF's cash flows are properly monitored and that:

  1. (1)

    all payments made by, or on behalf of, investors upon the subscription of units or shares of an AIF have been received;

  2. (2)

    all cash of the AIF has been booked in cash accounts opened:

    1. (a)

      in the name of:

      1. (i)

        the AIF; or

      2. (ii)

        the AIFM acting on behalf of the AIF; or

      3. (iii)

        the depositary acting on behalf of the AIF; and

    2. (b)

      at:

      1. (i)

        a central bank; or

      2. (ii)

        aCRD credit institution1; or

        1
      3. (iii)

        a bank authorised in a third country; or

      4. (iv)

        another entity of the same nature, in the relevant market where cash accounts are required, provided such an entity is subject to effective prudential regulation and supervision which have the same effect as EU law and are effectively enforced and in accordance with the principles set out in article 16 (safeguarding of client financial instruments and funds) of the MiFID implementing directive; and

  3. (3)

    where cash accounts are opened in the name of the depositary acting on behalf of the AIF in accordance with (2)(a)(iii), the depositary must ensure that no cash of the entity referred to in (2)(b), and none of the depositary's own cash, is booked on such accounts.

[Note: article 21(7) of AIFMD]

Depositary functions: safekeeping of financial instruments

FUND 3.11.21R
  1. (1)

    A depositary must hold in custody all AIF custodial assets.

  2. (2)

    The depositary must ensure that all AIF custodial assets that can be registered in a financial instruments account are registered in the depositary's books within segregated accounts opened in the name of the AIF, or the AIFM acting on behalf of the AIF, so that they can be clearly identified as belonging to the AIF at all times in accordance with the applicable law and CASS 6.1.16IA R (Depositaries of AIFs).

    [Note: article 21(8)(a) of AIFMD]

FUND 3.11.22EU

Financial instruments to be held in custody

1.

Financial instruments belonging to the AIF or to the AIFM acting on behalf of the AIF which are not able to be physically delivered to the depositary shall be included in the scope of the custody duties of the depositary where all of the following requirements are met:

(a)

they are transferable securities including those which embed derivatives as referred to in the last subparagraph of Article 51(3) of Directive 2009/65/EC and Article 10 of Commission Directive 2007/16/EC, money market instruments or units of collective investment undertakings;

(b)

they are capable of being registered or held in an account directly or indirectly in the name of the depositary.

2.

Financial instruments which, in accordance with applicable national law, are only directly registered in the name of the AIF with the issuer itself or its agent, such as a registrar or a transfer agent, shall not be held in custody.

3.

Financial instruments belonging to the AIF or the AIFM acting on behalf of the AIF which are able to be physically delivered to the depositary shall always be included in the scope of the custody duties of the depositary.

[Note: Article 88 of the AIFMD level 2 regulation]

Depositary functions: safekeeping of other assets

FUND 3.11.23R

For assets of the AIF that are not AIF custodial assets, a depositary must:

  1. (1)

    verify that the AIF, or the AIFM acting on behalf of the AIF, is the owner of the assets based on information or documents provided by the AIF or the AIFM and, where available, on external evidence; and

  2. (2)

    maintain, and keep up to date a record of those assets for which it is satisfied that the AIF, or the AIFM acting on behalf of the AIF, is the owner.

[Note: article 21(8)(b) of AIFMD]

Reuse of assets

FUND 3.11.24R

A depositary must not reuse the assets of the AIF without the prior consent of the AIF or the AIFM acting on behalf of the AIF.

[Note: article 21(10) third paragraph of AIFMD]

Depositary functions: oversight

FUND 3.11.25R

A depositary must:

  1. (1)

    ensure that the sale, issue, repurchase, redemption and cancellation of units or shares of the AIF are carried out in accordance with the applicable national law and the instrument constituting the fund;

  2. (2)

    ensure that the value of the units or shares of the AIF is calculated in accordance with the applicable national law, the instrument constituting the fund and FUND 3.9 (Valuation);

  3. (3)

    carry out the instructions of the AIFM, unless they conflict with the applicable national law or the instrument constituting the fund;

  4. (4)

    ensure that in transactions involving the AIF's assets, any consideration is remitted to the AIF within the usual time limits; and

  5. (5)

    ensure that an AIF's income is applied in accordance with the applicable national law and the instrument constituting the fund.

[Note: article 21(9) of AIFMD]

Delegation: general prohibition

FUND 3.11.26R
  1. (1)

    A depositary must not delegate its functions to third parties, except as permitted by FUND 3.11.28R.4

  2. (2)

    The prohibition in (1) does not apply to the delegation by the depositary of supporting administrative or technical tasks that are linked to its depositary functions.4

[Note: recital 42 and4 article 21(11) first paragraph of AIFMD]

FUND 3.11.27G

The use of services provided by securities settlement systems, as specified in the Settlement Finality Directive, or similar services provided by third-country securities settlement systems, does not constitute a delegation by the depositary of its functions.

[Note: article 21(11) fifth paragraph of AIFMD]

FUND 3.11.27AG
  1. (1)
    1. (a)

      4If a depositary performs part of its functions through a branch in another EEA State this is not a delegation by the depositary of its functions to a third party.

    2. (b)

      This is because ‘third party’ in FUND 3.11.26R means any party that is not part of the same legal entity as the depositary.

  2. (2)

    Paragraph (1) also applies where the depositary is the UK branch of an EEA firm and it performs part of its functions:

    1. (a)

      through a branch in another EEA State; or

    2. (b)

      from the EEA State where it has its registered office.

  3. (3)
    1. (a)

      A depositary that performs part of its functions through a branch or registered office in another EEA State should ensure that those arrangements do not impede the depositary’s ability to meet the threshold conditions.

    2. (b)
      1. (i)

        In particular, the arrangements should not impede the FCA’s ability to supervise the depositary effectively.

      2. (ii)

        For example, the FCA’s ability to supervise the depositary might be impeded if the depositary performed tasks other than administrative and supporting tasks from its branch or registered office in another EEA State.

Delegation: safekeeping

FUND 3.11.28R

A depositary may delegate the functions in FUND 3.11.21 R and FUND 3.11.23 R to third parties, subject to the following conditions:

  1. (1)

    the tasks are not delegated with the intention of avoiding the requirements of AIFMD;

  2. (2)

    the depositary can demonstrate that there is an objective reason for the delegation;

  3. (3)

    the depositary:

    1. (a)

      has exercised all due skill, care and diligence in the selection and appointment of any third party to whom it wants to delegate parts of its tasks; and

    2. (b)

      continues to exercise all due skill, care and diligence in the periodic review and ongoing monitoring:

      1. (i)

        of any third party to whom it has delegated parts of its tasks; and

      2. (ii)

        of the arrangements of that third party in respect of the matters delegated to it;

  4. (4)

    the depositary ensures that the third party delegate meets the following conditions at all times:

    1. (a)

      the third party has structures and expertise that are adequate and proportionate to the nature and complexity of the assets of the AIF, or the AIFM acting on behalf of the AIF, that have been entrusted to it;

    2. (b)

      (subject to FUND 3.11.29 R) for custody tasks in relation to AIF custodial assets, the third party is subject to:

      1. (i)

        effective prudential regulation, including minimum capital requirements, and supervision in the jurisdiction concerned; and

      2. (ii)

        an external periodic audit to ensure that the financial instruments remain in its custody;

    3. (c)

      the third party segregates the assets of the depositary's clients from its own assets and from the assets of the depositary in such a way that they can, at any time, be clearly identified as belonging to clients of a particular depositary;

    4. (d)

      the third party does not make use of the assets unless it has:

      1. (i)

        obtained the prior consent of the AIF, or the AIFM acting on behalf of the AIF; and

      2. (ii)

        given prior notification to the depositary; and

    5. (e)

      the third party complies with the general obligations and prohibitions relating to the depositary in FUND 3.11.5 R, FUND 3.11.5 G, FUND 3.11.9 R, FUND 3.11.21 R, FUND 3.11.23 R and FUND 3.11.24 R.

[Note: article 21(11) second paragraph of AIFMD]

Delegation: third countries

FUND 3.11.29R

A depositary may delegate custody tasks in relation to AIF custodial assets to an entity in a third country that does not satisfy the conditions in FUND 3.11.28R (4)(b), provided that:

  1. (1)

    the law of that third country requires those AIF custodial assets to be held in custody by a local entity;

  2. (2)

    no local entity satisfies the conditions in FUND 3.11.28R (4)(b);

  3. (3)

    the depositary delegates its functions to such a local entity only to the extent required by the law of that third country and only for as long as there is no local entity that satisfies the delegation conditions in FUND 3.11.28R (4)(b);

  4. (4)

    the investors of the relevant AIF are informed before their investment that such delegation is required due to legal constraints in the third country and of the reasons as to why the delegation is necessary; and

  5. (5)

    the AIF, or the AIFM on behalf of the AIF, has consented to the delegation arrangements before they become effective.

[Note: article 21(11) third paragraph of AIFMD]

Delegation: sub-delegation

FUND 3.11.30R

A depositary must ensure that a third party to whom the depositary has delegated functions does not, in turn, sub-delegate those functions unless the delegate complies with the same requirements that apply to the depositary, with any necessary changes, in relation to the delegation by the depositary of its functions in FUND 3.11.26 R to FUND 3.11.29 R.

[Note: article 21(11) fourth paragraph of AIFMD]

Delegation: omnibus account

FUND 3.11.31G

A depositary may delegate the safe-keeping of assets to a third party that maintains a common account for multiple AIFs, a so-called 'omnibus account', provided it is a segregated common account that is segregated from the third party's own assets.

[Note: recital 40 of AIFMD]

Provision of information

FUND 3.11.32G

The requirements of SUP 2 (Information gathering by the FCA or PRA6 on its own initiative) apply to the depositary, under which it must enable the FCA to obtain, on request, all information that the depositary has obtained while discharging its duties and that the FCA considers necessary.

[Note: article 21(16) of AIFMD]

AIFM of a non-EEA AIF

FUND 3.11.33R

An AIFM of a non-EEA AIF or a non-EEA feeder AIF3 which is marketed in the UK must:

  1. (1)

    ensure that the duties referred to in FUND 3.11.20 R, FUND 3.11.21 R, FUND 3.11.23 R and FUND 3.11.25 R are carried out in relation to that AIF by one or more:

    1. (a)

      firms that:3

      3
      1. (i)

        are established in the UK; and3

      2. (ii)

        which have the Part 4A permission of acting as trustee or depositary of an AIF; and3

      3. (iii)

        which have own funds of at least €125,000,3

      where the duties are carried out in the UK; or

    2. (b)

      entities that are not established in the UK, where the duties are not carried out in the UK; or3

    3. (c)

      firms that are established in the UK and which are carrying out the duties from a non-UK branch;3

  2. (2)

    not perform the duties referred to in (1) itself; and

  3. (3)

    provide the FCA with information about the identity of those entities responsible for carrying out the duties referred to in (1).

[Note: article 36(1)(a) of AIFMD]

Subordinate measures

FUND 3.11.34G

Articles 83 to 102 of the AIFMD level 2 regulation provide detailed rules supplementing this section.