Depositary services: A brief overview

To comply with governing directives, all regulated investment funds domiciled in the EU must appoint a depositary. But what does a depositary do, and why are they necessary? We interviewed two of our experts to explain more about this role and show you what to look for when selecting one.

Tags: Funds, International, Regulations, International banking
Published: January 23, 2019

The Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investments in Transferable Securities Directive (UCITS) require all EU-domiciled investment funds to retain a depositary. A simple search might define a depositary as an entity that monitors cash flows and oversees compliance with applicable regulations and investment restrictions – but their role is far more nuanced.

To dig deeper into depositary responsibilities, we sat down with two individuals who were instrumental to engineering our depositary services offering: Breda Sullivan, U.S. Bank head of depositary services – Europe and Barry O’Brien, U.S. Bank head of fund client relations – Europe.

 

Q: What’s the difference between a depository and a depositary?

O’Brien: While spelled similarly, these words represent two distinct concepts.

A depository generally refers to a centralized safekeeping facility.

A depositary, as defined under European law, is an entity eligible to act in a safekeeping and a fiduciary capacity in the EU member state of a collective investment scheme (fund), as well as providing global custody services.

A depositary is required by law for all EU funds to protect investors’ interests and assume liability for the safekeeping of their assets. It monitors a fund’s cash flows and, in effect, keeps all service providers in check by performing post-trade investment and borrowing restriction monitoring.

 

Q: Why are depositaries necessary when investing in Ireland? Is the market growing?

Sullivan: The Irish market has experienced substantial year-on-year growth and currently holds 2.4 trillion euros in assets relating to Irish domiciled funds. It’s worth noting that UCITS funds, which tend to be more retail-based and liquid in nature, represent 75 percent of the asset base, with Irish alternative fund structures growing at a significant pace as well.

There’s an additional 2.4 trillion euros of non-EU based alternative funds administered in this jurisdiction (e.g., U.S. limited partnership and limited liability company feeder funds), which has resulted in Ireland building a reputation as the preeminent center for alternative funds.

 

Q: What are depositary lite services?

Sullivan: Alternative non-EU based funds require the services of a depositary lite provider in order to market their fund into the EU. At U.S. Bank, we’ve been providing this service since 2014 to alternative funds – servicing $15 billion in assets.

Most of the activities of a depositary lite provider mirror those of full depositary service, including cash flow monitoring, fiduciary oversight and verification of not-in-custody assets. The key difference, however, relates to the liability regime. A depositary lite provider is not subject to the same “strict liability” requirements for loss of assets in custody, which is associated with the provision of custody services to EU-domiciled UCITS and AIFs.

 

Q: What qualities should investors consider when choosing a depositary?

O’Brien: When considering your different options, it’s essential to find a bank-backed depositary with a solid balance sheet and strong credit rating.

Most clients today demand a robust global custody offering with good global market coverage, as well as leading-edge technology with a great client-presentation layer. Look for a depositary with proven experience, as evidenced by how long they’ve been performing depositary or depositary lite functions and how large a book of business they’ve assembled.

 

 

In general, clients need a full-service provider adept at servicing the entire investment spectrum – from retail UCITS funds to alternative funds to private equity funds.

 

 

Q: Are certain depositaries better suited toward specific types of investors?

Sullivan: In general, clients need a full-service provider adept at servicing the entire investment spectrum – from retail UCITS funds to alternative funds to private equity funds.

Certain depositaries and administrators are more adept at servicing large retail-style UCITS and provide multilingual call centers to manage the fund’s investor base. Other depositaries have built specialisation in asset classes such as property. Others, like U.S. Bank – with $2 trillion in assets under custody across the range of asset classes – are adept in servicing funds across the spectrum.

Specialised depositaries, or “real asset” depositaries, which exist in the Luxembourg market, are a new facet that may start emerging in the Irish market. This is currently subject to industry consultation. In this structure, we might see depositaries that will only focus on servicing specific asset classes (e.g., private equity, real estate) and concentrate their specialisation in those areas.

 

Q: How does a depositary stay aware of and adjust to regulatory updates?

Sullivan: Monitoring regulations on an ongoing basis should be a priority of all depositaries. At U.S. Bank, we stay abreast of regulatory change at multiple levels, including: legal, risk, line-of-business compliance and enterprise compliance. We’re also an active member of the Irish Funds Industry Association – where I’m a member of the Depositary Committee – and participate in various sub-committees and thought leadership events to ensure we’re deeply engrained in the local market.

 

Q: Is the role of the depositary evolving? Do you expect the depositary role to evolve or change significantly into the future?

O’Brien: The evolution of the depositary role is all predicated on regulatory and political change. The U.K. exiting the EU may have severe consequences if a no-deal Brexit ensues, as unlikely as this seems. Also, the extension of the “passporting” regime to allow non-EU funds and non-EU managers to market and sell in the EU is uncertain and could significantly impact the depositary role.

 

Learn more about our depositary services offering and other European fund administration solutions.

 

 

Elavon Financial Services DAC, trading as U.S. Bank Depositary Services, is regulated by the Central Bank of Ireland and is registered in Ireland with the Companies Registration Office Reg. No. 418442. The registered office is Building 8, Cherrywood Business Park, Loughlinstown, Co. Dublin, D18 W319.