The European Commission formally published a draft Level 2 Regulation (the " L2 Regulation") in respect of UCITS V on 18 December 2015. This comes after the unofficial version has been in circulation for several months.

What is in Level 2?

This sets out more detailed provisions in support of Level 1 text across the following areas of UCITS V:

  • Details to be included in the depositary contract;
  • Depositary duties (details in relation to oversight duties, cash monitoring duties, safekeeping duties and ownership verification and record keeping duties);
  • Measures in relation to insolvency of sub-custodians, including the requirement for third country assessment and a legal opinion (which may be generic);
  • Safekeeping liability; defining loss and liability discharge; and
  • Depositary/management company independence and conflicts provisions.

What has changed in this version?

An analysis of the draft, compared to the earlier unofficial version, reflects mainly a drafting tidy-up exercise on the body of the document – amendments to the wording and form of some of the provisions – but very few substantive changes. The document is also formalised into full Regulation format, with an explanatory memorandum and a full set of recitals.

In terms of substantive changes of note, the provisions relating to links or group links between the management company and the depositary are more prescriptive; the management company must compare the merits of appointing the depositary as against the merits of appointing a depositary with no links and be able to demonstrate that the appointment of the depositary with links meets objective, pre-defined criteria and is made in the sole interest of the UCITS and its investors.

Similarly, there is a new provision requiring that a depositary must have a decision-making process in place (based on objective, pre-defined criteria in the sole interest of the UCITS and its investors) for choosing sub-custodians.

There is also a facility for national regulators to rely on the Commission's list of pre-approved third countries in the context of non-EU regulated banks at which a UCITS can have cash accounts.


The L2 Regulation is still a draft and still needs to go through an approval process with the European Parliament before being published in the Official Journal and coming into force 20 days later. Article 25 of the L2 Regulation retains a reference to it applying (i.e. having legal effect) six months after this. However, there are examples of delegated regulations applying immediately or with a shorter lead time. Interestingly, the explanatory memorandum within the L2 Regulation refers to the Commission's intention to "adopt the implementing legislation before the end of the transposition period for the UCITS V Directive (18 March 2016)."

It therefore remains unclear whether there will be a short period from 18 March 2016 (where Level 1 of UCITS V is effective) where Level 2 supporting measures are not in effect. It is still possible that Level 2 is in place and applicable from UCITS V Day 1. However, it is our understanding that, if there is still to be a delay to Level 2 implementation, ESMA may issue FAQs to address this.

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