Responses to ESMAs Consultation Paper on depositary insolvency protection and depositary independence


On 28 October 2014, the European Securities and Markets Authority (ESMA) published the responses to its consultation paper concerning technical advice on delegated acts required by UCITS V (the Consultation).  

UCITS V upgrades the duties and liabilities of UCITS’ depositaries by clarifying the safekeeping, oversight and cash flow monitoring functions with the aim of enhancing the protection of investors’ assets.  It also prescribes the types of entity that may act as a depositary.  The final text of the UCITS V Directive was published in the Official Journal of the EU on 28 August 2014.  The Directive came into force on 17 September 2014 and member states have until 18 March 2016 to transpose it into national law.

The Consultation asked for stakeholders’ views on proposals in two areas related to the depositary function: firstly, the insolvency protection of UCITS assets when the depositary delegates safekeeping duties to a sub-depositary; and secondly the requirement for the management company and the depositary to act independently. The Consultation closed on 24 October 2014.  

Here we review the responses to the Consultation submitted by the Investment Management Association in the UK (IMA), the Irish Fund Industry Association in Ireland (IFIA), and the Association of the Luxembourg Fund Industry (ALFI) (together  the Stakeholders).

ESMA's technical advice to the European Commission on delegated acts required by the UCITS V Directive

Insolvency protection when delegating safekeeping

In order to ensure against the event of insolvency of a sub-depositary, UCITS V requires this sub-depositary to take all necessary steps to ensure that the assets that it holds in custody are unavailable for distribution on insolvency.

ESMA’s proposals include steps to be taken by the sub-depositary including, but not limited to: 

  • “verifying that the applicable legal system recognises the segregation of the UCITS’ assets from those of the sub-depositary (which is not located in the EU) and that of the depositary;
  • recognising that the UCITS’ segregated assets do not form part of the sub-depositary’s estate in case of insolvency and are unavailable for distribution among or realisation for the benefit of creditors of the sub-depositary (if the latter is not located in the EU);
  • always maintaining accurate and up-to-date records and accounts of UCITS’ assets that readily establish the precise nature, amount, location and ownership status of those assets;
  • maintaining appropriate arrangements to safeguard the UCITS’ rights in its assets and minimise the risk of loss and misuse.”


Response to Insolvency protection when delegating safekeeping

The Stakeholders responded that the steps to be taken by the sub-depositary should apply mutatis mutandi where it outsources to another party. ALFI commented that UCITS V is not applicable to non-EU countries and that therefore it falls to the EU depositary to ensure its contractual arrangements achieve ESMA’s objective under UCITS V. 

In response to ESMA’s suggestion that a legal opinion be sought regarding the robustness of the legal system in the relevant non-EU jurisdiction, the Stakeholders highlighted that proportionality and flexibility was required, and that the depositary should be permitted to determine on a case by case basis whether the jurisdiction of the non-EU sub-depositary merited a legal opinion. They highlighted the contrast in the robustness, for example, of the US legal system versus the legal system of an emerging market country. In addition, the advice may be limited to certain situations or to a certain point in time, and will not keep up to date with legislative changes. Such legal advice will increase costs, which will ultimately be passed on to investors. Similarly, the change in relationships between the fund and its depositary will require amendments to documents including the Prospectus which will also result in increased costs.

The IFIA suggested that should the insolvency laws in a particular jurisdiction change and no longer guarantee the segregation of assets, it would be beneficial if a process was triggered whereby the depositary notified the management company and the National Competent Authority of the UCITS of this change.

The IMA responded that it was crucial for a depositary to keep the chain of sub-custodian delegation strictly under its control.

Both ALFI and the IMA noted that it may not be in the best interests of investors for a depositary to terminate a relationship with a sub-depositary between the parties.

Independence requirements

UCITS V provides that both the UCITS’ management company (or the investment company, i.e. a self-managed UCITS) and its depositary need to act independently and solely in the interest of the fund and its investors. To achieve this, ESMA proposes a combination of measures based on the management/governance and the structural links.

The Consultation asked for feedback on stakeholders’ preferences between two different routes to achieving independence, as follows:

Option 1:

  • the management company/investment company shall not have a direct or indirect holding in the depositary or vice-versa;
  • the management company/investment company and the depositary shall not be included in the same group for the purposes of consolidated accounts;

Option 2:

  • in case (i) the management company/investment company has a direct or indirect holding in the depositary or vice-versa or (ii) the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts, the choice of the depositary shall be justified to investors upon request;
  • in case the management company/investment company and the depositary are included in the same group for the purposes of consolidated accounts, at least [one third] of the members of the management bodies of these entities shall be independent, in the sense that they shall not be members of the management body or the body in charge of the supervisory function nor employees of any of the undertakings within the group.

Response to Independence requirements

As with the proposals regarding protection on insolvency, Stakeholders urged ESMA to consider the proportionality of its measures. They responded that they thought ESMA’s proposals of an outright prohibition on cross-shareholdings/group inclusion went beyond the policy objectives and the legal basis of UCITS V. They were also concerned that this would require the division a large number of entities in several member states with a significant share of the UCITS market.

The IFIA noted that independence between depositaries and fund managers is already a feature of the Irish funds industry. It stated that Option 2 resembles the system currently in operation in Ireland and that it is the most appropriate.

The IMA responded that looking at independence between the parties should not be done cumulatively, any form of link between them could be sufficient to jeopardise independence. They stated a preference for Option 1, on the grounds that this system is already in place in the UK. The existing independence requirement in the UCITS directive was interpreted in the UK as a prohibition against the management company and the depositary belonging to the same group of companies.

ALFI noted that it was possible the options could cause the segregation of a large number of entities. Its preference was for the Option 2; it stated that Option 1 was not a valid option as it would incur adverse consequences such as increased costs, concentration and consolidation of depositaries and management companies, and consequently increased systemic risk. Tempering its preference for Option 2, ALFI expressed concern that ESMA should not intervene in governance issues relating to group structure, organisation, internal processes and shareholder links.



The three respondents concurred in the main in their replies regarding the proposed insolvency protection measures. It is interesting to note the different viewpoints and preferences expressed regarding the independence consultation. Understandably, each of the three jurisdictions preferred their current interpretation of independence. If Option 1 is chosen, this will entail significant changes in several countries around Europe; Option 2 on the other hand will give fund managers and institutions a much wider scope when choosing depositaries.  

Next steps

ESMA will use the feedback received to finalise its technical advice and submit this technical advice to the European Commission by the end of November 2014. 

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