African financial institutions need to engage more proactively with their local regulators about the impact rule changes such as the European Union’s Alternative Investment Fund Managers Directive (AIFMD) and UCITS V will have on their businesses.
AIFMD and UCITS V require fully-compliant asset managers to appoint a depositary, which will provide safekeeping of assets, cash-flow monitoring and oversight. AIFMD subjects depositary banks under Article 22 to strict liability for any loss of financial instruments held in sub-custody, although a number of depositary banks have negotiated indemnification agreements and discharged liability to sub-custodians.
However, UCITS V explicitly bans depositary banks from discharging liability to their sub-custodians. As such, a number of custodian banks are forcing their sub-custodians to implement changes to their businesses.
“A number of African regulators are unaware of the implications of rules such as AIFMD and UCITS V and the impact they are having on sub-custodians. It is crucial African financial institutions highlight these challenges to their national regulators. While market participants’ involvement and lobbying can result in some changes in regulation, regulators are more likely to listen to other regulators about the challenges some rules have introduced,” said Habib Motani, partner at Clifford Chance, speaking at NEMA Africa in London.
One area where AIFMD is likely to bring challenges to sub-custodians is around asset segregation. The European Securities and Markets Authority (ESMA) has yet to make a final announcement around the extent to which assets need to be segregated. However, ESMA could force depositaries to ensure AIF and non-AIF assets are segregated, or that AIF assets are segregated by depositary. This would force radical changes around how assets are held at sub-custodians.
Meanwhile, strict liability provisions around lost financial instruments in sub-custody could force third countries to revise their local insolvency laws. “Changing insolvency laws is a huge deal and it can be a process that takes years. In order for the investor protection provisions laid down in AIFMD and UCITS V to work, local regimes in Africa might well be forced to change their insolvency laws,” said Motani.
African firms warned on impact of European regulation
African financial institutions need to engage more proactively with their local regulators about the impact rule changes such as the European Union’s Alternative Investment Fund Managers Directive and UCITS V will have on their businesses.