EU asset safekeeping review may disrupt custody activities

Regulators are hoping to harmonise the safekeeping requirements for UCITS and AIFMD funds, however this could mean stricter record-keeping requirements.

By Joe Parsons

An upcoming review of the asset safeguarding rules in Europe could potentially disrupt the activities of custodians, and may even indirectly raise costs for asset managers.

In May, the European Commission published draft amendments to both the AIFMD and UCITS directives, aiming to clarify the rules and resolve issues around asset segregation.

Regulators are hoping to harmonise the requirements between the two fund types and ensure consistent application. However, the funds industry is concerned the review could actually impose more stringent record-keeping and reconciliation requirements for assets held along the custody chain.

“The industry seeks to preserve the right to delegate registration and maintenance of books and records to duly appointed third parties. Asset records for UCITS and AIFs normally sit directly either at the depositary or at the delegate, but not with both,” said Adrian Whelan, senior vice president of regulatory intelligence, Brown Brothers Harriman, in an online blog.

“The use of common global record systems negates the requirement to replicate records. In fact, in practical terms the imposition of duplicate records would likely create additional confusion rather than efficiencies.”

Industry participants previously raised concerns as to which circumstances central securities depositories (CSDs) in the custody chain may be considered to be delegates, creating further uncertainty about the rules of segregation for UCITS assets.

Whelan added the review still creates confusion as to how reconciliations are conducted between CSDs (when it is considered a delegate) and the depositary.

“As such, the draft proposals risk being out of line with generally prevailing global best practice in this regard and have the potential to be operationally disruptive,” said Whelan.

“Mandated duplication of books and records would increase barriers to entry, reduce competition, and even cause some incumbents to exit.”

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