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The role of an AIF depositary

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The role of an AIF depositary

With the appointment, function, obligations, and liability of alternative investment fund (AIF) depositaries having undergone somewhat of an evolution in recent years, Head of Depositary in our Luxembourg office, Ashweeni Basenoo examines their key functional components.

The Alternative Investment Fund Managers Directive (AIFMD) essentially laid down the regulations for the authorisation, ongoing operation, transparency and reporting of EU and non-EU alternative investment fund managers (AIFMs) that manage AIFs or market AIFs into the EU. 

The AIFMD was transposed into the Luxembourg Law of 12 July 2013 on AIFMs (AIFM Law). Its main objective is to enhance investor protection by increasing the depositary missions and responsibilities.

What is a depositary?

A depositary is an independent third party that is responsible for the safekeeping of assets of the AIF, performing the cash flow monitoring and the oversight duties of the AIF. A depositary can be either a bank (DepoBank) or a professional depositary.  

Prescribed in the AIFMD, the requirement to appoint a DepoBank or a professional depositary is dependent on a number of factors, namely:

  • the location of the AIFM; 
  • the AIFM's marketing strategy;
  • the geographical focus of the AIFM's marketing activity; 
  • the location of the AIF(s) it manages;
  • investment strategy of the AIF; and
  • the redemption rights of the AIF.

What are the duties and responsibilities of the depositary?

The AIFMD reinforced the depositary obligations regarding custody, record keeping and ownership verification, as well as the due diligence and oversight on third parties. It also introduced the monitoring of AIF cash flows, rules of independence and conflict of interest management. Below are further details relating to the depositary duties:

Cash flow monitoring:

  • Reviewing of the daily cash flows relating to the AIF
  • Reviewing of significant cash flows to ensure the consistency with the constitutional documents 
  • Reviewing of the cash reconciliation performed by the administrator
  • Following up of discrepancies 
  • Reviewing of the timely settlement of transactions

Safekeeping of assets: 

  • Performing the ownership and existence check of the assets at the time of purchase and sales
  • Performing the ownership and existence check of the assets at least once a year
  • Maintaining an up-to-date record keeping of the alternative investment funds
  • Ensuring that the investments being made are in line with the constitutional documents

Oversight responsibility: 

  • Ongoing due diligence of the AIFM's organisation, procedures and controls
  • Ongoing due diligence on the service providers of the AIF
  • Oversight on the NAV as per the reporting cycle of the AIF
  • Oversight of the investment restrictions performed by the AIFM

What is depositary-lite?

Following the introduction of AIFMD, the fund marketing environment in Europe changed. Whilst the market remains open under the National Private Placement Regime (NPPR), there are a number of EU countries, such as Denmark and Germany, that have 'gold-plated' the conditions of marketing to investors in their respective country. 

These additional conditions include the requirement for AIFMs to appoint one or more entities to provide 'depositary-lite' services to each non-EU AIF they wish to market to investors in each of these countries. Depositary-lite requirements consist of cash flow monitoring, safekeeping of assets, and ongoing oversight responsibility. Broadly speaking, the obligations are similar to that of the full depositary arrangement. However, the critical aspect of depositary-lite is that an appointed service provider would not face the strict liability for the loss of assets, thereby easing balance sheet concerns.

A trusted provider

Ocorian is authorised to act as a depositary to AIFs domiciled in Luxembourg and is licenced in the UK and Jersey to offer depositary services to closed-ended structures holding non-financial instruments. We can also provide client-tailored depositary services as a stand-alone service or as an add-on to existing corporate and fund administration offerings.

Get in touch with our team to discuss how we could support your alternative investment operations and learn more about our AIF depositary services here.

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