CSSF Circular 18/697 on duties of AIF Depositary completing the framework

On 23 August, the CSSF released a new circular on the governance and organization of AIF (non-UCITS) fund depositaries.

This circular completes the existing legal framework for depositaries, after UCITS V and its dedicated circular, now it is time for the AIF (non-UCITS) fund depositaries. The circular encompass depositaries of funds other than UCITS, namely all forms of AIFs.

The circular addresses particular aspects linked to:

• Eligibility criteria to be an AIF depositary (fit and properness for management) as well as organizational rules and procedures
• The need to have conflicts of interest procedures and policies as well as escalation procedures
• The creation of new definitions, notably in the collateral area; the circular requires that the depositary be informed of all derivative transactions to know at all times where the fund assets are located
• Contractual relationship between depositaries, the AIFM, and other delegates
• And obviously segregation rules

The circular also describes the account organization and responsibilities at the level of the relationship between the fund and the depositary but also at the subsequent levels of (sub-) custody or delegation. The depositary has some roles and responsibilities over the network of custodians and delegates. The circular addresses the obligations per type of asset: financial, real estate and non-material (i.e., rights, patents…), target funds for fund of funds in terms of ownership verification and reconciliation.

In the circular, the CSSF introduces the concept of conflicts of interest preventing the depositary to act as asset manager, nor risk manager.

In terms of specific requirements, the depositaries will have to maintain a list of delegates (notified to the CSSF annually) that are each subject to a contractual and documented relationship along the circular principles. It must also establish rules and procedures on the handling of every relationship with an external party. The depositary is tasked in the context of derivative instruments to track changes in the margins applied to the fund on a daily basis. The CSSF clarifies the legal situation of assets offered as collateral by the fund or to the fund from depositary standpoint.

The depositary must have access to all necessary information to perform its activities, the circular imposes, in a similar fashion as the UCITS circular, proper communication between all stakeholders in the funds (AIFM, depositary and delegates). The communication point is especially important in the context of non-custodiable assets—the depositary has to be informed of any changes without delay.

In concrete terms, the circular imposes a framework to the AIF depositaries that is nevertheless adding a new prescriptive layer. Defining organizational and governance responses as well as strategies to cope with this circular is of utmost importance, as depositaries have to comply by 1 January 2019.

How Deloitte can help

Deloitte can help your depositary converge to the new standards put forward in the circular, evaluating your current organization and the necessary adaptations to the new environment. Deloitte can also help you define and implement strategies to develop your activities.

Deloitte can help you stay on top of regulatory news with our RegWatch Kaleidoscope service, and we leverage new rules into positive strategies.

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