01 February 2015

EFAMA responded to consultation on asset segregation under the AIFMD

EFAMA welcomed the opportunity to reply to the ESMA Consultation Paper entitled Guidelines on asset segregation under the AIFMD.

EFAMA encourages ESMA to consider that AIF client asset protection is not necessarily better attained via a more minute account segregation at the level of the sub-custodian – as the differences between the two main proposed options would seem to suggest. In this regard, the greater “security” provided under Option 1 - where at the delegate level, the AIF client assets of one depositary would not be co-mingled with the AIF client assets of another depositary - would be only apparent.

EFAMA would like to draw ESMA’s attention to the specificity of the record-keeping obligation set forth under Article 16(1) of the Directive 2006/73/EC, related to the implementation measures of the MiFID. This clause requires the third-party to “distinguish” the assets of the depositary’s clients from its own assets and from the assets of the depositary in such a way that they can at any time be clearly identified as belonging to clients of a particular depositary.

On the other hand, the “segregation” between assets belonging to AIFs and assets belonging to non-AIFs at the level of the third-party delegate, as proposed under both of ESMA’s proposed options, would in no way either strengthen the protection of AIF assets, or contribute to more transparency in the intermediated holding chain for the purpose of increasing investor protection, when compared to their mere “distinction” via record segregation. The commingling of AIFs and non-AIF assets at the level of delegate would not constitute an obstacle for maintaining a high standard in terms of investor protection where the depositary and its delegates maintain robust processes, procedures and associated controls to:

• Distinguish all records of an AIF’s financial instruments
• Monitor the settlement cycle of the transactions relative to the financial instruments invested
• Oversee the assets’ reconciliation process at the fund administrator level
• Reconcile on a periodic and ongoing basis the assets in an omnibus or collectively managed account with the depositary’s book records held for the AIF’s assets
• Minimise the risk of loss of financial instruments and assess the custody risks throughout the custody chain
• Exercise due care in relation to the financial instruments to ensure a high standard of investor protection

In addition, given that many of the delegated third-parties are located outside of the EU, it would in any event be arduous for them to apply the level of increased segregation envisaged under Option 1. Were this to be possible, the outcome would necessarily be higher fees charged by the delegated parties, which in turn would translate into higher costs for AIFs to the detriment of their investors, as typically the funds pay the fees of sub-custodians out of the assets of the fund. In sum, where rendered possible under the applicable third-country practices and regulations, nothing should prohibit depositaries and their delegates to adopt more detailed segregation arrangements in the clear interest of AIF investors willing to confront the associated higher costs.

Full response

© EFAMA - European Fund and Asset Management Association