Luxembourg's Financial Sector Supervisory Authority (CSSF)
has issued on October 11, 2016 Circular 16/644, which sets out
revised rules applicable to all Luxembourg credit institutions
acting as depositary banks for UCITS funds as well as to all
Luxembourg UCITS, including self-managed funds, and/or their
The circular sets out regulatory requirements clarifying rules
under the updated Luxembourg investment fund law implementing the
UCITS V directive, which came into force on June 1, and the
European Commission's Level 2 delegated regulation EU2016/438
regarding the obligations of depositaries, as well as various other
For the most part the rules detailed in the CSSF circular are
supplementary to the revised UCITS regime, providing clarification
in areas such as the organisational requirements relating to the
chain of custody and detailing the duties and responsibilities of
the designated UCITS depositary and any sub-custodians, as well as
the depositary's responsibility for monitoring financial
The circular covers eligibility criteria for UCITS depositaries,
including human resources and technical capabilities, the process
of regulatory approval by the CSSF, the contract designating a
depositary, governance and organisational issues such as managing
conflicts of interest, internal procedures regarding the depositary
function, organisational matters regarding the safekeeping of
assets, depositary functions in the case of assets that are not
subject to safekeeping, due diligence regarding investment in other
funds, the depositary's right of access to information required
to fulfil its responsibilities, collateral management, the
depositary's responsibilities regarding exchange-traded and OTC
derivatives, reconciliation procedures, and business continuity
Further guidance is expected to be issued shortly by the CSSF on
the degree of independence of a depositary in relation to a UCITS
structured as an open-ended investment company (SICAV) managed by a
Chapter 15 management company, as analysts have indentified a lack
of detail in the circular on this matter.
Most of the requirements set out in the circular are general to
the UCITS V regime. However, it includes guidance specific to
Luxembourg regarding the requirement for asset segregation below
the depositary level regarding sub-custodians and entities at lower
levels to which depositary duties are delegated.
According to the previously applicable CSSF Circular 14/587,
which the new circular replaces, sub-custodians may use omnibus
accounts for all client assets managed collectively within UCITS
and alternative investment funds subject to the Alternative
Investment Fund Managers Directive, as long as accounts can always
be clearly identified as belonging to clients whose assets are
For sub-custodians below the first level of delegation, the CSSF
does not require omnibus accounts to be dedicated to UCITS
depositary or collective investment fund clients, an approach that
eases requirements for Luxembourg-based UCITS depositaries and may
presage similar Europe-wide guidance in the future from the
European Securities and Markets Authority.
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