ALFI agrees with the trends identified in the consultation report. In addition, it invites IOSCO to look forward in its work to how markets will look in the future.
With regards to its view on segregation, ALFI states that segregation should not be an aim by itself but it is a way to enhance the protection of custodiable financial instruments in case of insolvency of the depositary or its sub-custodians. Such financial instruments must hence be subject to an adequate segregation, in order to ensure that they are distinguished from the depositary's own assets and at all times identifiable as an asset belonging to that UCITS or to a given sub-fund of a UCITS with multiple sub-funds. The depositary must at least, concerning those assets which it holds in custody, ensure that:
The financial instruments are properly registered
The records and segregated accounts are maintained in a way that ensures their accuracy, and in particular their correspondence with the financial instruments held for the UCITS (or a given sub-fund of a UCITS with multiple sub-funds)
Due care is exercised in relation to the assets in order to ensure a high standard of investor protection
Appropriate organisational arrangements are established in order to minimise the risk of loss or diminution of the assets, or of rights in connect on with those assets as a result of fraud, poor administration, inadequate registering or negligence
The UCITS' ownership right over assets is verified
ALFI believes that segregation of accounts is one means to achieve insolvency remoteness and investor protection. While segregation should not be an aim by itself, ALFI agrees that it is of importance in relation to insolvency protection where the objective is that a depositary and its sub-custodians (“third party”) takes all necessary steps to ensure that in the event of an insolvency all UCITS/AIF assets held by this third party are unavailable for distribution among, or realisation for, the benefit of creditors of this third party.
An omnibus account structure is commonly recognised as an effective method of protecting end investors. ALFI also believe that a full segregation client by client throughout the custody chain does not provide additional protection for the end investor from a legal perspective. This is because the omnibus account structure is recognised by various legal systems as a set of enforceable property rights.
© ALFI - Association of the Luxembourg Fund Industry
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