ESMA Backtracks on UCITS V Separation Rule

Europe’s financial regulator has reworked a crucial rule on the separation of a UCITS fund manager and its affiliated custodians, following a consultation on the UCITS V directive.

The European Securities and Markets Authority (EMSA) submitted its final technical advice to the European Commission on delegated acts of depositories on Friday, November the 28th.

In the original ESMA consultation on UCITS V, it proposed an option of full legal separation between the UCITS manager and its custodian. This would have meant, for example, State Street Global Advisors (SSGA) not being able to use State Street as its custodian or depositary bank.

“Obviously this would have been very dislocative to the industry,” says Sean Tuffy, head of regulatory intelligence, Brown Brothers Harriman.

However, with the issue of its final technical advice, “ESMA walked back from that position and opted for a more pragmatic solution, based around commonality of management and functional independence,” Tuffy adds.

ESMA initially proposed the option of an independent depositary bank as a way to avoid a potential conflict of interest between providing prime brokerage, administration or collateral management for a UCITS and its depositary services.

Separately, ESMA published on Monday a consultation on the asset segregation requirements under the Alternative Investment Fund Manager Directive (AIFMD), as it looks to establish guidelines in the case of a depositary of an AIF delegating its safe-keeping duties to a third party.