On August 23rd 2018, the CSSF published Circular CSSF 18/697 (“Circular”), which (i) specifies organizational requirements for depositaries of funds which are not subject to Part I of the Law of December 17th 2010 on undertaking for collective investment (the “2010 Law”), (ii) modifies Circular CSSF 16/644 applicable to depositaries of Luxembourg UCITS subject to Part I of the 2010 Law, and (iii) repeals Chapter E of IML Circular 91/75, as amended by Circular CSSF 05/177.
This new circular provides clarification on depositaries of funds other than UCITS (i.e., all forms of Alternative Investment Funds (“AIF”)). The Circular applies to (i) Luxembourg credit institutions, (ii) Luxembourg investment firms and professional depositaries of assets other than financial instruments and (iii) Luxembourg branches of banks or investment firms established in another EU Member State, that act as depositary for an AIF. The Circular also applies to AIFs themselves as regards their interaction with their depositary.
The Circular complements and clarifies the Law of July 12th 2013 on alternative investment fund managers and delegated regulation 231/2013 (“Level 2 Regulation”). Its structure and content tracks closely that of Circular CSSF 16/644 applicable to UCITS.
The Circular first deals with non-bank depositaries i.e. professional depositaries of assets other than financial instruments and investment firms providing guidance and clarifications on how they carry out the function of depositary of an AIF.
Part II of the Circular sets the criteria to be eligible and to be approved as a depositary of an AIF. Acting as depositary of an AIF requires a specific authorization.
Part III of the Circular deals with governance and organization. It is reiterated that a depositary cannot carry out investment management and clarified that such a prohibition applies to all entities in the custody chain. Neither can the depositary accept a delegation of the risk management function but they may be delegated certain support tasks linked to such function.
The Circular contains precisions regarding the operating memorandum or service level agreements to be put in place with the various fund actors with whom the depositary will come into contact and sets out clearly the procedures to be put in place in case the depositary becomes aware of irregularities concerning the AIF.
The Circular goes into a lot of detail on the organizational measures that the depositary has to have in place in relation to the assets of the relevant AIF. It includes precisions on segregation of accounts both at the level of the depositary as well as down stream in the custody chain and the due diligence the depositary is expected to carry out on sub depositaries. In this regard it partly anticipates the amendments to be brought to the AIFM Regulation by the Commission Regulation of July 12, 2018 as regards safe-keeping duties of depositaries. There are specific provisions applicable in relation to certain asset classes such as real estate and private equity.
The Circular clarifies that every depositary must have an emergency plan for each of the markets where it has designed a third party as delegate.
There are clarifications regarding the flux of information between the depositary and the AIF and AIFM and the obligation of the depositary to inform the authorities. In particular depositaries of an AIF whose AIFM is not established in Luxembourg must enter into an information sharing agreement with such AIFM.
In the event of termination of a contract with the depositary or of the liquidation of the AIF the Circular makes it clear that the outgoing depositary must keep the cash and securities accounts open until such time as a new depositary is appointed or the liquidation is closed.
The Circular comes into effect on January 1st 2019. Entities already approved as depositary of a UCITS or an AIF at the date of entry into force of the Circular are not obliged to request a new approval on the basis of the Circular but must conform to its provisions.
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