On 15th July the Commission de Surveillance du Secteur Financier (the "CSSF") issued a new Circular 14/587 (the "Circular") which is applicable to UCITS' depositary banks and to the UCITS themselves regarding their relationship with their depositaries.

The aim of the Circular is to align the Requirements applicable to UCITS' depositaries with the requirements imposed by Directive 2011/61/EU on alternative investment fund managers ("AIFMD"). Such alignment anticipates the implementation of the UCITS V Directive into Luxembourg law.

The Circular will supersede the previous IML Circular91/75.Such new Circular represents a Shift from the previous "principle-based approach" to more stringent and detailed rules.

The Circular focuses on the four following points:

  • Asset segregation within the depositary
    In line with what is foreseen in UCITS V and in the AIFMD, the obligations to which the depositary bank is subject change according to the nature of the assets held in custody. Thus, a distinction has to be drawn between assets which are physically held by the depositary and those that are to be held by sub-depositaries or specialised third parties. In addition, the Circular introduces a new mechanism which foresees a level-by-level problem solving which involves the depositary, the fund's management company and the financial regulators in order to deal with the loss of assets in custody.
  • Initial and continuing due diligence procedure on all sub-depositaries and other appointed service providers
    As stated above, the "principle-based approach" has been abandoned, so that the Circular now clarifies the minimum rules that must be included in a depositary's due diligence procedure. The requirements applicable to due diligence procedures include, among others, criteria which enable the depositary to select its service providers and a description of the organisational resources that such service provider must have (e.g. in order to ensure the proper exchange of information on the assets).
  • Conflicts of interest policy
     The Circular takes into account the fact that a depositary may perform several functions which might result in conflicts of interest. Those functions include for example prime brokerage services, collateral management services and administrative agency services. The Circular also deals with procedures in Respect of conflicts that may rise from the sub-delegation of services by the depositary.
  • Accounting and follow-up of the cash/liquidity flows
    A description of the infrastructure and of the organisational resources which must be implemented within the depositary and its service providers is further set out in the Circular. The aim of these requirements is to ensure that the above financial actors are able to properly monitor the cash and liquidity flows.

The depositary's liability regime shall not be affected by the Circular. The liability regime remains subject to the Law of December 17th 2010 on undertakings for collective investment.

Luxembourg credit institutions and UCITS have Until December 31st 2015 to comply with the requirements of the Circular. At that time, Chapter E of IML Circular 91/75 shall no longer be applicable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.