6. Depositaries
AIFMD II - European Parliament Final Report - Depositaries
An authorised credit institution established in a Member State may be allowed by the competent authority of another Member State to be appointed as depositary of an AIF in this other Member State, following a case-by-case assessment, provided that:
- the competent authorities have received a motivated request by the AIFM for the appointment of a depositary in another Member State demonstrating the lack of the relevant depositary services able to meet the needs of the AIF having regard to its operational strategy; and
- the national depositary market of the home Member State of the AIF fulfils at least one of the following conditions:
- that market consists of fewer than seven depositaries providing depositary services to AIFs which are authorised or registered in a Member State under the applicable national law, and managed by an authorised EU AIFMs, and none of those depositaries has assets safekept (financial instruments that can be held in custody and other assets) exceeding EUR 1 billion or the equivalent in any other currency. Assets held by a depositary for non-EU AIF managed by an EU AIFM and the own assets of a depositary shall be excluded from the computation;
- the aggregate amount in that market of assets safekept (financial instruments that can be held in custody and other assets) on behalf of AIFs which are authorised or registered in a Member State under the applicable national law, and managed by an authorised EU AIFM does not exceed the amount of EUR 60 billion or the equivalent in any other currency. Assets safekept by depositaries for non-EU AIFs managed by EU AIFMs and the own assets of depositaries shall be excluded from the computation.
The depositary of a third-country AIF may be established in this third country provided that the third country is not listed as a high-risk country by the Commission at the time of the AIFM’s application for authorisation. The reference to the time of the AIFM applicant for authorisation is neither in the EU Parliament draft report nor in the Commission proposed directive. Also, the depositary shall not be situated in a third country mentioned in Annex I to the relevant last updated version of the Council conclusions on the revised EU list on non-cooperative jurisdictions for tax purposes. The reference to the last updated version of the Council conclusions was an expected change as the Council conclusions on such EU list may be amended from time to time. Also, the EU Parliament final report adds that if a third country where the non-EU AIF is established is added to Annex I after the time of the AIFM’s application for authorisation, closed-ended funds shall continue to be considered to meet that criterion for two years. Moreover, a third country that has been continuously mentioned in the grey list of the Council conclusions for over three years shall be considered to be mentioned in Annex I to those conclusions.
Access the European Parliament Final Report of 2 February 2023 here..
AIFMD II - The Council position - Depositaries
Unlike the Commission proposal, the Council position refers to investor CSD with the same provision as in the European Parliament draft report: the provision of services by a central securities depositary acting in the capacity of an investor CSD as defined in article 1, point (f) of Commission Delegated Regulation (EU) 2017/392 shall be considered a delegation of the depositary’s custody functions.
The home member state of an AIF may empower its national regulatory authorities to permit, following a case-by-case assessment, a credit institution with its registered office in the EU and authorised in accordance with Directive 2006/48/EC (Banking Consolidation Directive) with reference to point (a) of Article 21(3) and established in another member state to be appointed as a depositary, provided that the regulatory authorities have received a request with justification from the AIFM that demonstrates the lack of relevant depositary services, given the AIF’s investment strategy, in its home jurisdiction, justifying the appointment of a depositary in another member state.
The national depositary market of the AIF’s home member state must fulfil at least one of the following conditions: the market must consist of fewer than seven depositaries providing depositary services to EU AIFs (authorised under article 4 (k) (i)) of the AIFMD) and managed by an EU AIFMs(authorised under article 7(1)) and no depositary has AIF assets under custody exceeding €1 billion or the equivalent in other currency.
This threshold excludes depositaries acting under article 36(1a) of the AIFMD and the depositary’s own assets; the aggregate volume in the market of assets under custody on behalf of EU AIFs and managed by an EU AIFMs does not exceed €30 billion or the equivalent in other currency. This threshold excludes depositaries acting under AIFMD article 36 (1a) and the depositary’s own assets.
Even if these conditions are fulfilled, the authorisation to allow the appointment of a depositary in another member state shall be granted on a case-by-case assessment of the lack of available depositary services in the AIF’s jurisdiction, given its investment strategy. When authorising the appointment of a depositary in another member state, the regulatory authorities shall notify ESMA. This provision is without prejudice to the full application of article 21, with the exception of point (a) of paragraph 5 on the place where the depositary is to be established. These precisions regarding the appointment of a credit institution appear only in the Council position but neither in the Commission proposal nor the European Parliament draft report. In fact, the Council position envisages no desire to establish a depository passport and therefore does not stipulate the drafting of a study by the European Commission in this respect.
The transitional provision relating to the appointment of a depositary in an EU country that is not the AIF’s home member state, or in cases where the AIF is not regulated, the home member state of an AIFM, is not modified by the Council position. By contrast, the Commission proposal and European Parliament draft report have removed the transitional date from the wording.
Where the regulatory authorities of the home member state of an AIF or, where the AIF is not regulated, the authorities of the home member state of an AIFM, have reasonable grounds to suspect that acts contrary to the AIFMD are being carried out by a depositary not subject to their supervision, they shall without delay notify ESMA and the regulatory authorities of the depositary in question in a manner as specific as possible. The recipient authorities shall take appropriate action and inform ESMA and the notifying regulatory authorities of the outcome of that action. The Council position follows the approach of the European Parliament draft report, with the threshold lowered to reasonable grounds, and the obligation applies in relation to depositaries and AIFMs.
The Council position does not refer to the Council conclusions of 2020 on the revised EU list on non-co-operative jurisdictions for tax purposes but only to the Council conclusions on the revised EU list on non-cooperative jurisdiction for tax purposes.
Access the European Council position of June 2022 here.
AIFMD II - European Parliament draft report - Depositaries
The provision of services by a CSD acting in the capacity of an investor CSD shall be considered a delegation of the depositary’s custody function, contrary to the case of an issuer CSD.
Some institutions (see above) are allowed by the regulatory authorities of the home member state of an AIF or AIFM to be appointed as a depository, although they are established in another member state. The European Parliament draft report has added the requirement for the regulatory authorities to decide on a case-by-case basis and notify ESMA of the decision taken. The end date of the transitional provisions is deleted as in the Commission proposal.
The European Commission shall, by 24 months after the entry into force of AIFMD II, carry out a comprehensive study on the potential benefits and risks of introducing an EU depositary passport, in particular in terms of reducing cost, and making a greater choice of competitive depositary services from other member states available to managers. The Commission proposal refers to a review, not a comprehensive study, by 60 rather than 24 months after the entry into force of AIFMD II.
Where the regulatory authorities of a member state have reasonable grounds to suspect that acts contrary to this directive are being or have been carried out by an AIFM not subject to the supervision of that regulatory authority, or by an entity appointed as depositary by an AIFM, they should notify ESMA and the regulatory authorities of the home and host member states of the AIFM or of the entity concerned as specifically as possible. The recipient authorities shall take appropriate action and inform ESMA and the notifying regulatory authorities of the outcome of their action and, to the extent possible, of significant interim developments. The threshold for the notification obligation is lowered to reasonable grounds and may relate to a depositary, whereas the Commission proposal limits the notification obligation to acts committed by an AIFM only.
AIFMD II - European Commission proposed directive, November 2021 - Depositaries
The depositary role is vital for trust and confidence in the fund industry. The current AIFMD depositary regime is deemed to be effective concerning investor protection. However, the current regime may entail a lack of competition for depositary business in some member states - hence the creation of the possibility for the depositary to be established in a different member state from the AIF. These are the Commission’s proposed updates and additions.
The definition of central securities depositary is added by a reference to Regulation (EU) No 909/2014 (Central Securities Depositories Regulation).
The regulatory authorities of the home member state of an AIF or, in cases where AIFs are not regulated, regulatory authorities of the home member state of an AIFM, may allow a credit institution registered in the EU, authorised under Directive 2013/36/EU (Capital Requirements Directive), and established in another member state to be appointed as a depositary. This option is without prejudice to the full application of article 21 of the AIFMD incorporating the main provisions applicable to depositaries, except their place of establishment. This wording was already included in the transitional provisions of the existing AIFMD but with July 22, 2017, as an end date. In the Commission proposal, the end date of the transitional provision is deleted, meaning the appointment of such a depositary was already a possibility until 22 July 2017 under the current AIFMD . However, this wording would be the main provision in AIFMD II, without any end date.
A depositary established in a third country may be appointed as depositary of an AIF if:
- The third country is not at high risk of money laundering as defined by article 9 of the fourth AML Directive. As mentioned above, some jurisdictions have been recently added to this list by the European Commission, including the Cayman Islands, Jordan, and Morocco.
- The third country is not mentioned in appendix I to the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes. As mentioned above, the Cayman Islands appears in appendix I, preventing the use of services provided by a depositary in the Cayman Islands. However, the Cayman Islands does not appear in the latest conclusions of the Council dated October 4, 2022. Therefore, attention should be paid to the final wording of AIFMD II regarding the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions.
The requirement for the depositary to exercise due skill, care, and diligence in the selection, appointment, and monitoring of a delegate does not apply to a central securities depositary acting as an issuer CSD.
The provision of services by a CSD acting as an issuer CSD is not a delegation of the custody function.
Within 60 months after the entry into force of AIFMD II, the European Commission shall initiate a review which that includes an assessment of the appropriateness of complementing the AIFMD II with a depositary passport.
You can access a copy of the directive proposed by the European Commission here.
