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Rules on the use of depositaries prescribed by the AIFM
Directive could be hit by a lack of suitable institutions, with many
saying moves to offer such a service face a number of regulatory
and financial challenges. Anneken Tappe reports
AIFMD: Concerns over
lack of suitable depositaries
The implementation
deadline for the AIFM
Directive is rapidly
approaching and, with it, the need for
private equity houses to use depositaries
to protect investors. But firms hoping
to offer this kind of service are being
faced with numerous obstacles that
could make implementation difficult.
One firm considering offering such
a service is UK private equity fund
administrator Ipes. However, Ipes
is concerned that existing rules will
make it difficult, if not impossible, to
secure the required insurance.
“For depositaries, the line to
being held strictly liable is drawn
too harshly. It is a ‘guilty before
proven innocent’ regime, which is
spooking depositaries and insurers.
Without such insurance, it might
be impossible for any firm but the
multinational banks to provide
this service, some of whom have
experienced financial instability in
recent years,” says Justin Partington,
commercial director at Ipes.
Aside from firms like Ipes, major
European banks have been touted
as potential suppliers of depositary
services, particularly French banks
as existing financial legislation in the
country is close to that of the AIFMD.
The French banking sector, however,
has been hit hard by the eurozone
crisis, mostly due to its extremely
high exposure to sovereign debt in
the eurozone’s periphery. Some have
questioned the wisdom of having
institutions that already have stressed
balance sheets taking on the role
of safekeeping investor funds on a
massive scale. This has the potential to
further concentrate systemic risk in a
few major institutions.
The news has once again led to
questions over the suitability of
introducing mandatory depositary
rules on the private equity industry.
“In private equity, there is no
standard custodian role,” said Ben
Robins of Mourant Ozannes at the
recent Legal Week Private Equity
Forum; many in the industry see the
new requirement as unnecessary.
The AIFMD’s concept of
custodians is taken from securities
trading. In the EU, the Central
Securities Depositories (CSDs)
are regulated to streamline and
harmonise the process of securities
trading across the continent.
“For
depositaries,
the line to
being held
strictly liable
is drawn too
harshly. It
is a ‘guilty
before proven
innocent’
regime”
Justin
Partington,
Ipes
Depositories offer book entry
services – an electronic register –
which dematerialises the trading
process, making it more efficient.
Another very important part of CSDs
is clearance and settlement. The idea
of an obligatory use of depositories in
private equity was introduced around
2007 to add a layer of investor and
ultimately consumer protection.
However, private equity
transactions differ substantially from
securities trading and critics say a
depository structure modelled for the
latter is unlikely to fit the business
model of the former. EVCA argued
that depositories risk an interference
with the investment decision, which
would translate into a concern for
both the investor and fund manager.
Private equity depositaries would
also have the obligation of oversight
of a fund’s activities, says James
Greig, partner in the financial
services and regulatory practice at
PricewaterhouseCoopers.
Effectively, depositaries would be
asked to pre-clear transactions; this
could not only slow down the buy
and sell process, but also impose a
disruptive force on funds’ strategies. n
Issue 5 – June 2012