CSSF Circular 14/587
Depositary Banks, UCITS and Management Companies
The Luxembourg Supervisory Authority CSSF has published Circular 14/587 in order to clarify existing provisions by defining organisational rules, roles and responsibilities for depositary banks, and the interaction of management companies with the depositary.
Scope and background
The Circular replaces section E of IML circular 91/75 and targets credit institutions acting as depositary bank for UCITS subject to Part I of the Law of 17 December 2010 and, as the case may be, their management company.
These new rules draw heavily on the Alternative Investment Fund Managers Directive (AIFMD) and anticipate the transposition of the UCITS V Directive. However, applicable rules to depositary banks of AIFs are set up by the Law of 12 June 2013 implementing AIFMD and therefore are not included in the Circular.
The extent of detail provided in the Circular clearly shows the regulator’s determination to move away from a principle-based regulation in favor of detailed guidance.
Key attention points of the Circular
Depositary banks will have to implement internal procedures that govern the acceptance of mandates and their execution. These procedures shall cover all specificities of UCITS for which the bank acts as depositary, including the consideration of intended investments. They shall also specify and analyse, on a preliminary basis, which type of UCITS according to their investment strategy, the depositary bank would be able to service, considering existing processes and internal controls.
Depositary banks will have to enhance provisions applied to the selection and the monitoring of sub-custodians and third-party custodians. They shall notably conduct due diligence in order to ensure that there is an appropriate level of protection for assets entrusted to such entities and that guarantees provided are adequate (similar to guarantees provided by the depositary bank itself). The Circular clarifies the holding securities via a Securities Settlement System (SSS) is not a delegation of custody function. However, in some circumstances, this should not deter the depositary bank from undertaking due diligence of sub-custodians albeit in an abridged form.
Specific due diligence shall also be performed on specialised intermediaries when investment are made in target UCI(T)S.
Depositary banks will have to ensure that segregation of assets at the sub-custodian level shall be ensured between collectively managed assets, not collectively managed assets and own assets of the depositary.
An escalation processes shall be set up between depositary banks and management companies to report reciprocally any detected anomalies.
Depositary banks are required to ensure adequate monitoring and accounting of cash accounts and cash flows. Adequate processes and procedures are to be put in place to ensure this. The UCITS (or its management company) shall ensure that the depositary bank receives all information needed to fulfil its obligations regarding recognition and proper monitoring of cash.