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.
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 Breda Sullivan, U.S. Bank head of depositary services – Europe, who was instrumental to engineering our depositary services offering.
Q: What’s the difference between a depository and a depositary?
Sullivan: 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?
Sullivan: 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.