Published on March 4, 2014
CORDIUM POWERPOINT MASTER March 4, 2014 1
AIFMD Surgery Webinars - Depositaries The webinar will begin shortly… You can join either by VoIP or dial in by telephone Follow call in details if you select to use Telephone audio March 4, 2014 2
Questions You can submit your questions using the Questions area in the GoToWebinar console © Copyright March 4, 2014 3
AIFMD Surgery Webinars: Depositaries Bill Prew, Chief Executive Officer, INDOS Financial firstname.lastname@example.org Emma Stevens, Executive Director Prime Brokerage, Securities Division, Goldman Sachs International Emma.Stevens@gs.com Cordium Chair: Jonathan Wilson, Project Director Panelist: Bobby Johal, Managing Consultant, Technical © Copyright March 4, 2014 4
Agenda • • • • • • • Requirements for variation of permission applications Recap AIFMD Depositary Requirements Full Depositary Depositary-lite Depositary-lite models Is Depositary Lite required? Operational impact © Copyright
Result from VoP & Business Plan webinar poll Have you seen a drafted depository agreement? 30% Yes No 70% 64/130 attendees answered © Copyright March 4, 2014 6
Requirements for variation of permission applications • Process will differ in different EU jurisdictions, but for majority of firms seeking to apply to the FCA by 22 January 2014: • Identify depositary(s) on VoP application (section 9) • Firms should be (1) • “sufficiently advanced” contractually and • “confident” the arrangements will comply with AIFMD • Confirmation of contractual relationships • at least one month before the date on which the AIFM intends to begin managing AIF • Likely 21 June 2014 at the latest • FCA will seek confirmation that depositary firms are willing to act. (1) http://www.fca.org.uk/firms/markets/international-markets/aifmd/uk-aifms/q-a-full-scope-aifms. © Copyright
Requirements for VoP applications … continued • Managers planning to rely on reverse solicitation should state reasons in the VoP Regulatory Business Plan • Opting-in to depositary-lite later is an option but will require FCA notification (and an update or addendum to the offering memorandum) • Beware of capacity constraints in the depositary market and timeframes for onboarding of depositaries • Perform due diligence on selected providers: • Reference the due diligence in the VoP Regulatory Business Plan • Be prepared to share this information with the FCA on request • INDOS has shared a Manager Depositary Selection Checklist to facilitate and record due diligence www.indosgroup.com/wp-content/uploads/2013/12/AIFMD-Depositary-Due-Diligence-AssessmentChecklist-Nov-2013.pdf © Copyright
Recap AIFMD Depositary Requirements AIFMD Depositary requirements are driven by a combination of the domicile of the AIFM and AIF and marketing practices: • EU AIFM of EU AIF – Subject to Full Depositary requirements (Article 21) • EU AIFM of non-EU AIF – Subject to lighter depositary regime (Article 36) – only if the non EU-AIF marketed to EU investors through private placement • Non-EU AIFM of EU or non-EU AIF – not subject (at least initially) to any depositary requirements irrespective of whether AIF being marketed to EU investors, except if marketing into certain countries (e.g. Germany, Denmark, France ‘gold plating’), and any other country specific requirements (e.g. Ireland QIAIF requirements). © Copyright
Full Depositary • EU AIFM of EU AIF – Subject to Full Depositary requirements (Article 21 AIFMD) • EU AIFM must ensure a single depositary appointed for each EU AIF it manages • EU AIFs requiring a full depositary generally have a custodian/ trustee in place today • The role of the depositary is similar to the existing role of the custodian except that the depositary is now required to perform a broader range of duties and is required to take on the strict liability for loss of financial instruments • The depositary must generally be an EU credit institution and, in most cases, the depositary must be located in the same jurisdiction as the EU AIF. © Copyright
Depositary-lite • Non-EU AIF marketed by EU AIFM to EU investors through private placement are subject to certain depositary requirements (Article 36 AIFMD) • AIFM must ensure one or more entities appointed to carry out the depositary duties of: • Cash flow monitoring (Article 21.7); • Safe keeping of assets, both financial instruments and ‘other assets’ (Article 21.8); and • Oversight (oversight of fund valuations; subs & reds; settlement; distributions; compliance with law and regulations, investment restrictions and leverage) (Article 21.9) • Unlike Article 21 (EU AIFM / EU AIF) no strict liability for loss of assets, and no requirement to appoint a single depositary - therefore referred to as ‘Depositary-Lite’. © Copyright
Depositary-lite…. continued • • • • Existing prime broker(s) and custodian(s) and existing administrator already substantially perform AIFMD requirements of safe keeping and cash flow monitoring, respectively. The Oversight duties are an entirely new requirement for non-EU funds Where a UK firm provides any of the services it must hold an Article 36 Custodian/ Part 4a FSMA 2000 FCA authorisation. Non-UK firms can be appointed, but the FCA will want to be comfortable appropriate firms are proposed in the AIFM’s Variation of Permission Application and that the AIFM is undertaking appropriate due diligence over them The regulatory position for Irish administrators (that do not currently have a regulated affiliate depositary), particularly with respect to performance of the oversight duties, remains unclear Whilst currently no requirements for the depositary to be domiciled in UK, if the AIFMD passport is extended to non-EU AIF managed by UK AIFM (potentially 2015 onwards), FCA rule book (FUND 12) states depositary must be domiciled in UK or in the domicile of the AIF. © Copyright
Depositary-lite models Different depositary-lite models have emerged as the table below highlights: Depositary Duties from AIFMD Articles Model 1 Single Depositary Model 2 Hybrid Model 3 Multi -firm Depo Firm Administrator Prime Broker(s) & Custodian(s) Prime Broker(s) & Custodian(s) Article 21(8)(b) – Safekeeping/ Record Keeping of other assets Depo Firm Administrator Article 21(9) – Oversight Depo Firm Depo Firm Article 21(7) – Cash flow Monitoring Article 21(8)(a) – Safekeeping of financial instruments Single Depositary © Copyright
Is Depositary-lite required? • Article 36 (depositary-lite) only applies if a non-EU AIF is being marketed to EU investors • Marketing is broadly defined in the AIFMD as a direct or indirect offering or placement of an AIF at the initiative, or on behalf of, the alternative investment fund manager, to investors domiciled, or with a registered office, in the EU • Reverse solicitation does not constitute marketing but very little regulatory guidance (FCA being a notable exception) across the EU as to what constitutes marketing vs. reverse solicitation • Feedback from various sources appears to be that around two thirds of EU AIFM / non-EU AIF appear to be leaning towards depositary-lite • Ultimately will the decision for many managers come down to risk appetite? © Copyright
Operational impact (general) • Operational and legal impact different for full depositary or depositary-lite • Whilst prime brokers, depositaries, administrators and other providers will need to work together in different ways to implement the required model, should not be a material operational impact on managers (no trade files etc) but new contracts and new providers (even if an affiliated depositary of existing administrator) • AIFMs themselves are required to ensure compliance with the depositary requirements of the directive and will need to assess providers and be comfortable appropriate firms being used • Role of provider(s) will require disclosure in the AIF offering memorandum • Depositary contracts will typically be between AIFM, AIF and depositary. Should be a straight forward negligence standard (no liability caps) and balanced terms. Under depo-lite where PBs / custodians performing safe keeping duties may be a small amendment to existing agreements. © Copyright
Operational impact (prime broker view) • Much of the day to day process for prime brokers will remain unchanged as the operational flows are inline with those followed for the custody (or sub-custody) offering today but changes are required to certain operational processes • Some of these changes require additional transparency on client data to be provided to the full depositary or entities performing depositary lite functions • Full depositaries are also requiring additional data on prime brokers sub custody networks and the due diligence process employed by them on these entities as well as additional transparency on their internal infrastructure and how they conduct their own due diligence • The prime brokerage and depositary industries are in many cases still debating how the full depositary will work in practice and differing models are emerging in relation to legal structure of the Depositary/Sub Custodian model • UK prime brokers (and any other UK firms performing depo-lite duties) are also required to obtain authorisation, or a variation of permission, from the FCA to become an Article 36 Custodian . © Copyright
Contacts Bill Prew, Chief Executive Officer, INDOS Financial email@example.com Emma Stevens, Executive Director Prime Brokerage, Securities Division, Goldman Sachs International Emma.Stevens@gs.com Cordium Jonathan Wilson, Project Director firstname.lastname@example.org Bobby Johal, Managing Consultant, Technical email@example.com © Copyright
Disclaimer Cordium Consulting Group Ltd accepts no liability to any person (to the fullest extent permitted by law) for any advice, opinions, conclusions or any other information in this presentation, other than that which can reasonably be expected to the intended recipient. Any review, re-transmission, dissemination or other use of, or taking of any action in reliance upon this information by persons or entities other than the intended recipient is prohibited under all circumstances and may be unlawful. This presentation is not intended to nor should it be taken to create any legal relations or contractual relationships. Cordium Consulting Group Ltd is unable to exercise control over the content of information contained in transmissions made via the internet. For these reasons it is inappropriate to rely on information contained in transmissions made via the internet without obtaining written confirmation of it. Cordium Consulting Group Ltd is a private limited company registered in England and Wales with registered number 5963788. © Copyright 3/4/2014 18
Questions You can submit your questions using the Questions area in the GoToWebinar console For more information or sales enquiries please contact firstname.lastname@example.org © Copyright March 4, 2014 19
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