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
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.
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.
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
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
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.
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.
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