Europe’s Fund Industry Warns ESMA on Asset Segregation Rules

Two European fund associations have warned rules on segregated accounts for alternative investment fund (AIF) and non-AIF assets could cause additional complexity.

In a response to the consultation paper on the rules from the European Securities and Markets Authority (ESMA), both the Association of the Luxembourg Fund Association (ALFI) and the European Fund and Asset Management Association (EFAMA) argued the segregation of AIF and non-AIF assets through separate accounts at the sub-custody level does not provide greater protection of investor’s assets.

In ALFI’s response to ESMA it states the level of segregation requirement would mean the setting up and “maintenance of multiple accounts with associated costly controls and reconciliation risks.”

Under Europe’s Alternative Investment Fund Management Directive (AIFMD), it requires a delegate of the depositary bank to safe-keep financial instruments by registering them in an account in the delegate’s books and records, holding them separately from any other accounts.

ALFI states this requirement would not strengthen protection of AIF assets, and would not contribute to adding transparency in the “intermediated holding chain, nor accelerate the recovery process in case of insolvency of any of the parties.”

Furthermore, it also argues the rules on the separation of proprietary assets and customer assets does not necessarily provide better protection. It states in the case of an insolvency of a sub-custodian, it would be more beneficial for the depositary to retrieve all assets in an omnibus account by way of “one instruction as opposed to the need of sending a multitude of instructions to retrieve assets from a multitude of accounts.”

Both ALFI and the EFAMA call for “the commingling of AIF and non-AIF assets” in the same account, and argue “considerations should be given to, at least, commingle assets that are collectively managed such as assets of AIF, UCITS or any other regulated fund.”