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Alternatie investment funds and depositaries - Coggle Diagram
Alternatie investment funds and depositaries
In relation to AIFMD there is no concept of a role of custodian, instead there is an enhanced role of a party called a depositary for each AIF
The AIFMD was introduced to enhance investor protection and the role of depositary was one of the measures introduced to ensure that was achieved
The main aim of a depositary's role is the safekeeping of assets and ensuring that for instance the issue and redemption of units is carried out in accordance with applicable regulatory law and the funds rules
AIFMD is very detailed and prescriptive as to the depositary's role and the associated liability it accepts for undertaking this role
This is perhaps the biggest different between a custodian and depositary, the extent of each party's liability
A depositary is subject to strict liability which is far more onerous and stringent in terms of apportionment of liability
The depositary is responsible for any damage and/or loss caused by their acts and omissions regardless of culpability
A depositary acts as custodian as well as having to function of independent oversight or an auditor like function in relation to the fund
The depositary must ensure the following criteria are met
The funds assets are held independently of the investment manager
That the funds accounting records are reconciled on a regular basis with third party records
That each investors entitlement is correctly calculated
The ultimate aim of the AIFMD is to ensure that the depositary is preventing fraud, error and omissions and conflicts of interest between the fund and its manager and part of its investor protection remit - it is try a role of independent oversight
The AIFMD definition of a depositary is such that the entity has to be either
A credit institution (i.e deposit taking bank)
An investment firm authorised to safe keep assets (i.e act as custodian) and which must comply with certain capital adequacy rules
A company wholly owned by a credit insittution
A company or institution which provides investors with equivalent protection to that of a depositary and has its liabilities guaranteed by a credit insittution
Generally non EU institutions or company which fall into the criteria of who can act as depositary may act provided they meet equivalent standards as if they were in the EU
The AIFMD stipulates that the fund manager cannot also act as depositary, otherwise the key point of independence is out and the the funds prime broker can only act as depositary if there is clear separation of the depositary function from the prime brokerage function (a separate branch so there is no overlap of staff)
Looking at European countries where AIFMD applies (Germany, Italy and Luxembourg), despoitaries must be banking institutions licensed to conduct deposit taking business
In other European countries, non bank institutions an undertake the role but in practice the role of depositary is dominated by banks given their standing and capital behind them, a key consideration for many when considering the appointment of a depositary because of the reassurance that significant capital and net assets provide