More rules impacting the UCITS depositary industry

Luxembourg’s UCITS depositaries, management companies and self-managed UCITS will have to deal with a revised set of complementary rules, issued through CSSF Circular 16/644 (the “Circular”).

Today, the Luxembourg supervisory authority of the financial sector, the CSSF, published a new circular addressed to Luxembourg credit institutions acting as depositary banks for UCITS and to all Luxembourg UCITS and management companies acting for these UCITS. The new Circular not only provides a set of regulatory requirements clarifying certain rules provided by the Luxembourg UCI Law and the Commission Delegated Regulation (EU) 2016/438 with regard to obligations of depositaries (the “UCITS V level 2 measures”), the Circular also provides clarification on certain aspects beyond these rules.

The majority of the rules set out by the new Circular are complementary to the amended UCI Law and the UCITS V level 2 measures. They clarify the organisational requirements as regards notably the chain of custody with a clear description of the duties and responsibilities for both the UCITS depositary and the sub-custodian. Similar clarification as regards the requirement of independence of the UCITS depositary from the UCITS and the latter’s management company, if any, would also have been welcome. As it stands, the new Circular does not provide further guidance in this context. In particular the level of independence of a depositary from a UCITS-SICAV, managed by a so-called Chapter 15 management company, is still in need of regulatory guidance which should be issued in the coming weeks.

Among the few Luxembourg-specific requirements are the CSSF’s clarifications with regard to the requirement of asset segregation beyond the depositary level, i.e. at the first sub-custody level and at any other level beyond. As already detailed by current regulation, CSSF Circular 14/587, sub-custodians at the first level may operate with so-called omnibus accounts for all client assets that are managed collectively (i.e. for UCITS and AIFs), provided that they can at all times be clearly identified as belonging to the clients of the depositary whose assets are managed collectively. For sub-custodians beyond the first level, the CSSF does not even require that omnibus accounts thus opened be dedicated to UCITS depositary clients or clients that are managed collectively. This approach by the Luxembourg regulator eases the burden for Luxembourg based UCITS depositaries and may well be one step ahead of a related guidance provided by the European regulator, ESMA.

The new Circular will enter into force tomorrow, on 13 October 2016 and will replace CSSF Circular 14/587 as amended by CSSF Circular 15/608 as of said date. Back in March 2016, the CSSF announced its revision of CSSF Circular 14/587, as amended, in order to adapt the circular, which was issued prior to the implementation of UCITS V in Luxembourg and thus does not reflect the depositary related provisions of the amended Luxembourg UCI Law, which entered into force on 1 June 2016.