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Luxembourg regulator updates rules for UCITS depositaries

November 2016 - Finance. Legal Developments by Chevalier & Sciales .

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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 management companies. 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 matters.

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 flows.

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 management.

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 managed collectively.

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.

The CSSF circular, which is available only in French, came into force on October 13. It can be accessed at http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf16_644.pdf.