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Changes to safekeeping requirements for UCITS and AIFs

  • United Kingdom
  • Financial services and markets regulation
  • Financial services


The EU Commission has published proposed amendments to the UCITS V and AIFMD safekeeping regimes that seek to implement ESMA’s recent opinion on asset segregation and depositary delegation. In this briefing we look at the key changes and potential impacts of these proposals.

The EU Commission recently published two draft delegated regulations which seek to amend the AIFMD delegated (Level 2) Regulation and the UCITS V delegated (Level 2) Regulation (together the “Regulations”) in relation to depositaries safekeeping duties.

To read the delegated regulation amending the AIFMD delegated (Level 2) Regulation

To read the delegated regulation amending the UCITS V delegated (Level 2) Regulation

The changes follow on from ESMA’s Opinion on asset segregation and the rules on depositary delegation to CSDs, published in July 2017, in which they stated that a number of changes needed to be made to the Regulations in relation to the rules on segregation of assets held by depositaries and their delegates to clarify the requirements under the Regulations. The opinion followed consultations with industry on the issues of insolvency and segregation.

To read the ESMA opinion, click here.

The proposed amendments to the Regulations are likely to have significant impact for depositaries and their delegates, both from an operational and also from a contractual perspective. There is also likely to be impact in other linked areas such as triparty repurchase arrangements, prime broker agreements and collateral arrangements.

Key changes


Alignment of AIFMD and UCITS provisions on segregation of delegates (but not in relation to liability) with AIFMD brought up to the higher UCITS standard.

Changes to AIFMD depositary agreements to reflect amended segregation requirement.  Possible changes to UCITS depositary agreements to reflect updated language in the UCITS Regulation (where appropriate).

ESMA has interpreted the Regulations so that there is a requirement for depositaries to carry out reconciliations between their own internal accounts and the records of their delegates.

Requirement for depositary to create and maintain its own books and records separate from those held by global custodian.  There is much debate in the market as to the interpretation of the requirement and what is meant by a depositary’s “internal accounts and records” when custody is delegated.  Depending on how such matters are resolved, this could have far reaching consequences for depositaries as this is not compatible with the current market practice of depositaries relying on the books and records of delegates.  Depositary records are likely only to be duplications of custody records and therefore seem to add no additional investor protection.

The Financial Conduct Authority has previously taken a different approach and has not required depositaries to have their own records.

Delegates now subject to a requirement to ensure that assets are registered in the name of the AIF or AIFM in the records of the issuer.

No real practical changes as, in practice, custodians are involved in this now.

Additional minimum requirements for delegation agreement put in place between depositary and global custodian and in any further sub delegation arrangements throughout the entire custody chain.

Repapering of global custody agreements and all other custody agreements down the chain to reflect additional requirements.

Global custodians need to be able to identify the whole custody chain.

Requirement to negotiate new terms with CSDs which has not proved possible to date.

Risk for depositaries that fail to agree required contractual obligations down the chain. 

Experience with AIFMD and UCITS V was that the custodians were reluctant to agree additional segregation obligations and record keeping requirements on the basis that they themselves are not subject to AIFMD/UCITS.  This is still arguable under the proposed new requirements.

A requirement for delegates to segregate assets on a depositary by depositary basis (in addition to segregation from their own assets, other client assets and the depositary’s own assets).

Requirement to create new accounts per depositary down the chain, introducing extra operational requirements and costs.  However, some arrangements may already implement this level of segregation.

Additional requirements for delegates to maintain records so they can establish the nature, location and ownership status of assets at any time.


Requirement for statements to be provided by the custodian to the depositary on a regular basis and when there is a change of circumstances, detailing the assets of the clients of each depositary.

Additional reporting requirements and the need to have an ability to flag and notify changes.

Additional requirements where the delegate is outside of the EEA, to obtain a legal opinion as to the adequacy of insolvency law protection and to ensure that the delegate meets any requirements of the local regime to safeguard the assets on any insolvency.

Requirements to obtain legal opinions considering insolvency implications if custody is delegated outside EEA and the consequential costs and time implications of seeking (and implementing) such advice.


The issue for AIFs is that they tend to invest in less well-established markets where insolvency laws may be less sophisticated or only recently brought up to international standards and thus as yet untested before the local courts.  As a result legal opinions obtained may be caveated to reflect such uncertainty as to whether the assets will be protected on an insolvency.  Therefore, the choice of markets available to AIFs may be reduced if depositaries and AIFMs are not able to comply with this requirement.

Since the proposed draft regulations are drafted as paragraph-by-paragraph amendments to the Regulations, no consolidated version of the Regulations has been published. We have therefore prepared consolidated copies for client use.

To read the consolidated copy of the proposed amended text of the UCITS Level 2 Regulation, click here.

To read the consolidated copy of the proposed amended text of the AIFMD Level 2 Regulation, click here.


There are four weeks to submit responses on the draft regulations, closing on 26 June 2018. It is unclear what the timeline following closure of the consultation period might be, but the suggestion on the EU’s website is that the next step will be publication of the text of the final regulations with an Explanatory Memorandum detailing the feedback received.

On implementation, the draft regulations will have direct effect in EU Member States. No further local implementation will be required. The drafts indicate that they will become law twenty days after their publication in the Official Journal of the EU and, from that date, there will only be a six-month implementation period before the changes are effective. Given the nature and complexity of the operational and technical changes required, and the need to re-paper across the custody chain, this timeline seems extremely unrealistic.

Whilst the timeline for Brexit is currently unclear, it is possible that draft regulations will come into force either before the UK leaves the EU in March 2019 or during the subsequent transitional period and in either case will therefore bind UK depositaries.

How we can help

Eversheds Sutherland is a leading adviser to the securities services industry and was heavily involved in interpreting and advising on AIFMD and UCITS V for depositaries and custodians - including negotiation of depositary and custody agreements. We can assist with assessing the impact on your depositary and custody businesses across multiple locations, including the UK, Luxembourg and Ireland, as well as advising on the repapering that may be required.