EUROPE: EC consults on UCITS Depositary functions

Friday July 3 2009

Following Commissioner McCreevy `s announcement of the EC `s intention to tighten UCITS Depository rules in May 2009, the EC has today launched a wide-ranging public consultation on the UCITS Depositary function.

This public consultation comes as part of a comprehensive review of the existing European regulatory principles which are applicable to depositary functions. The European commission says that it will make an important contribution to clarifying and strengthening the regulation and supervision of UCITS depositaries, in particular in the light of recent Madoff fraud.

The consultation seeks views and evidence in the key areas of Duties of the Depository, Responsibilites of the Depository, Organisational requirements as per MiFID and supervision.

* Depositary `s duties: The consultation invites views on how depositary safe-keeping and supervisory duties should be better harmonised. It seeks clarification on the depositary safe-keeping duties for each class of assets that are eligible within a UCITS portfolio and invites views on whether supervisory duties should also be further clarified and harmonised, and if so how to do so.

* Responsibility regime: The consultation invites views on how to improve UCITS investors ` protection if a depositary performs its duties improperly or if it becomes insolvent. The consultation seeks to identify the relevant risks that might materialise. The Commission considers that the burden of proof should be borne by the depositor. The Commission also proposes that there should be additional requirements where assets are entrusted for safe-keeping through a network of sub-custodians. It also seeks views on the form of a liability regime which would allow investors to adequately mitigate losses.

Following the Madoff Affair, Paris criticised Luxembourg `s mutual fund rules on custodian banks duties to compensate investor losses saying they weren `t tough enough.

* Organisational requirements: The consultation invites views on the introduction of rules on organisation and conflict of interests based on existing MiFID rules.

* Eligibility criteria and supervision: According to the AIFM proposal, depositories should be credit institutions based, authorised and supervised in the EU. An issue that is already being fiercely debated, the consultation asks whether a similar approach should be adopted for UCITS depositaries and how supervisory rules might be strengthened.

The consultation also covers issues which are not directly linked with depositaries duties but which are particularly relevant for ensuring an increased level of investor protection within the UCITS framework (for example valuation).

The deadline for responses to this consultation is 15th September 2009.

Click on the above link to download the consultation.