Investment Funds – CSSF Circular – Clarification of the relationship between the custodian and the prime broker in case of a SIF

In a Circular issued on 5 September 2008, the CSSF clarified the interaction between the prime broker and the custodian of a SIF. In Luxembourg, the prime broker must be a financial institution subject to the control of a supervisory authority of a State with a supervisory regime recognised to be equivalent to that provided by EU legislation. Prime brokers are essential to SIFs that implement a hedge fund strategy or that make use of derivatives. By setting up four guidelines, the Circular should facilitate the use of prime brokers by SIFs.

Scope

Those rules are exclusively applicable to specialized investment funds, i.e. funds set up under the 2007 Law on Specialized Investment Funds (the ‘SIF Law’) and hence the provisions of this Circular do not cover funds set up under the 2002 Law.

Guidelines

Acceptance of the prime broker by the custodian

The custodian has to approve the SIF’s choice of prime broker given the fact that the custodian has to arrange its relationship with the SIF and the prime broker so as to be able to fulfil its duty of supervision of assets. The approval by the custodian of the SIF’s choice of prime broker is limited to ensuring that the prime broker fulfils the following criteria:

• The prime broker is a financial institution regulated by a supervisory authority in a state in which the supervisory regime is recognised as being equivalent to the regime provided ofr by Community law;

• The prime broker is a financial institution which is recognised and specialized in this type of transactions.

Relationship between the prime broker and the custodian

The custodian has the right to information and a right of intervention concerning the composition of the portfolio of the SIF. It must also have access to the assets that are entrusted to the prime broker. The contractual relationship between the SIF and the prime broker or between the custodian and the prime broker will contain the required procedures to that effect. However, the custodian does not need to have information about the correspondents to which the prime broker has entrusted the SIF’s assets.

General administration tasks

In the case of a SIF having the form of a fond commun de placement (commun fund), the prime broker might be contractually required to carry out all operations concerning the day-to-day administration of the SIF’s assets.

Disclosure

The sales documents of a SIF using a prime broker must contain an accurate description of the implications of such use and the related risks.