The Commission’s delegated regulation (EU) 2016/438 of December 17, 2015, which updates the UCITS regime provisions on the obligations of depositaries, has taken effect as of October 13. The UCITS V Level 2 regulation sets out detailed uniform rules in particular regarding the duties of the depositaries of UCITS funds.

The regulation lays down requirements regarding depositaries’ duties, delegation arrangements and the liability regime for UCITS assets under custody, designed to provide a high level of investor protection.

Written agreement

To ensure that the depositary performs its duties properly, the regulation provides a detailed list of all the elements to be included in the written depositary contract. It should notably provide adequate detail on the categories of financial instruments in which the UCITS may invest and the geographical regions where investments may be made.

In addition, the contract should set out the escalation procedure to be followed should any discrepancies be detected, including notification of the management company or investment company, and provide for termination of the agreement as a last resort if the depositary believes the required level of investment protection is not ensured.

Depositary’s duties

The regulation states that as a rule, the depositary must perform four types of duty. With regard to oversight, it must ensure consistency between the number of shares or units issued and the subscription proceeds received, ensure that appropriate valuation policies and procedures for the assets of the UCITS are effectively implemented, verify the fund’s compliance with applicable law and regulations as well as its rules and instruments of incorporation, and check that its income is calculated accurately.

As part of its cash monitoring duties, the depositary must maintain a clear overview of all inflows and outflows of cash and maintain periodically updated procedures for monitoring of the UCITS’ cash flows. It should also ensure that all payments made by investors for subscription to the shares or units of the UCITS have been received and booked in one or more cash accounts.

Its safekeeping duties include keeping in custody all financial instruments held by the UCITS that may be registered or held in an account directly or indirectly in the name of the depositary or a third party to which safekeeping functions are delegated. For assets that are not financial instruments subject to custody, such as certain derivatives or cash deposits, the depositary must verify and maintain records of their ownership.

The due diligence duties of the depositary entail implementing and applying a due diligence procedure for the selection and ongoing monitoring of any third party to which safekeeping functions are delegated. The depositary’s obligations correspond to those applicable both to the UCITS itself and to its management company.

Liability for losses

The depositary is liable in the event of loss of a financial instrument held in custody by the depositary itself or by a third party to which safekeeping has been delegated, unless the depositary can demonstrate, by according to a list of conditions, that the loss has resulted from an external event beyond its reasonable control and whose consequences would have been unavoidable despite all reasonable efforts to the contrary.

Operational independence

To ensure the protection of investors, the management company or investment company and the depositary must be operationally independent. Any existing or arising group link between them must be addressed with appropriate policies and procedures.

The measures set out in the Commission’s delegated regulation update the depositary rules in line with the most recent iteration of the retail fund regime, UCITS V, while bringing the UCITS requirements into line with those applicable to alternative funds and their depositaries under the 2011 Alternative Investment Fund Managers Directive.