3 big questions on AIFMD and depositories

In preparation of the coming into force of the Alternative Investment Fund Managers Directive, Andrew Shrimpton, Global Head of Regulatory Compliance and member of the executive board at Kinetic Partners, and I were asked to turn our thoughts to how depositories could be affected. Duncan Wood of Lexis Nexis zoomed in on 3 areas, first asking Andrew…

…what are the implications as regards liability?

The vast majority of hedge funds are domiciled outside the EEA. Non EEA-AIFs managed by a UK AIFM or marketed to EEA investors under art 36 of AIFMD are not subject to the liability provisions in AIFMD art 21.

And, will there be a change in operating models?

Yes, according to Andrew. The three core depository activities of ‘oversight’, ‘cash monitoring’ and safekeeping under art 36 or the ‘depository-lite’ regime can be undertaken by separate entities or art 36 custodians. Kinetic Partners envisage the following model emerging for a UK AIFM:

Cash monitoring—AIFMD, art 21(7)

• Entity—Regulated Irish Administrator
• Permission—the firm will not require the ‘acting as AIF depositary’ under Irish transposition of AIFMD

Safekeeping—AIFMD, art 21(8)

• Entity—UK authorised custody bank
• Permission—the firm will require the ‘acting as AIF depositary’ with limitation to art 21(8) activities under UK transposition of AIFMD

Oversight—AIFMD, art 21(9)

• Entity—UK authorised BIPRU 730K firm
• Permission—the firm will require the ‘acting as AIF depositary’ with limitation to art 21(9) activities under UK transposition of AIFMD

What about AIFMs who are within scope of AIFMD depository requirements?

My turn to answer. While depositories have been reviewing their operating models for some time in preparation of AIFMD, it is inevitable there will be some impact on how the depository market operates and prices its services going forward. In mature markets the rising cost risk might be mitigated somewhat by the presence of a strong sub-custodian market. However, in emerging markets, qualified sub-custodians may be harder to locate. AIFMs will need to review any contractual arrangements with their current depository before 22 July 2013 to ensure they are compliant with art 21(2), and take steps to secure appropriate arrangements are in place between a depository and any appointed sub-custodian. It may be that large scale depositories with global reach can assume some of the sub-custody risk but it remains to be seen how many sub-custodians will be willing to assume liability to an AIF, and how depositories remodel in these changing times.