By way of preamble and as a reminder, a depositary of a Luxembourg fund may currently fall under either (1) the regime of the UCITS Directive and Regulation(“UCITS Depositary Regime”), (2) the regime of the AIFM Directive and Regulation(“AIFM Depositary Regime”), or (3) the distinctive regime provided for by Luxembourg Law (“Luxembourg Depositary Regime”). Unregulated Luxembourg funds which are not managed by an authorised AIFM are simply not required to appoint a depositary.
Back in October 2016, the CSSF published Circular 16/644 1 in order to provide clarification on the UCITS Depositary Regime. On 23 August 2018, the CSSF published Circular 18/697 which is applicable to non-UCITS depositaries. This new circular provides clarification on both the AIFM and Luxembourg Depositary Regimes.
To quite a large extent, the structure and content of Circular 18/697 match those of Circular 16/644. The two circulars even now share their Annex I listing the information to be provided by depositaries to the CSSF. The differences between the two circulars are mainly sourced by the type of entities which are eligible as depositaries, by the type of funds and assets to be safe-kept, and -of course- by diverging applicable laws and regulations.
Circular 18/697 first provides clarifications and additional precisions in relation to non-banking entities which, under certain conditions, are eligible to act as depositaries under both the AIFM and the Luxembourg Depositary Regimes (but not under the UCITS Depositary Regime). Namely, these are certain qualified investment firms, the professional depositaries of assets other than financial instruments, and the entities designated as per Article 37(a) of the 2013 AIFM Law .
Circular 18/697 appropriately confirms the CSSF’s views on the existing Luxembourg Depositary Regime by incorporating most of Chapter E of IML Circular 91/75 . As a matter of sound practice and, where relevant, it nevertheless recommends depositories governed by the Luxembourg Depositary Regime to comply with the AIFM Depositary Regime which entails a higher level of investor protection.
All non-UCITS depositaries, whether governed by the AIFM or Luxembourg Depositary Regime, are subject to the provisions of Circular 18/697 relating to the depositary's appointment and approval by the CSSF. Grand-father measures apply to depositaries already approved under the (similar) provisions of Circular 16/644.
Circular 18/697 lists a series of specific prescriptive measures to be complied with by depositaries when they safe-keep other (non-financial instrument) assets belonging to funds investing in real estate, other funds, non-listed issuers, intellectual property, financial derivative instruments, or movable property.
In the context of the AIFM Depositary Regime, Circular 18/697 partly anticipates the amendments to be conveyed to the AIFM Regulation by the recent Commission Regulation of 12 July 2018 as regards safe-keeping duties of depositaries. This is notably the case in relation to the obligations of segregation, information and access, as well as to the delegation contractual documentation.
In relation to segregation and in line with the Commission Regulation referred to above, Circular 18/697 appropriately no longer requires that a client omnibus account dedicated to collectively managed assets is maintained with delegate (sub) custodians.
Circular 18/697 shall come into force on 1 January 2019, whereas the Commission Regulation referred to above shall not come into force before 2020.
In its final section, Circular 18/697 extends, as provided for by the Luxembourg 2010 UCI Law , the scope of Circular 16/644 to the depositaries of funds which are governed by Part II of such Law and which are permitted to market their units to retail investors in Luxembourg.
1 See our Newsflash dated 13 October 2016 "New CSSF Circular 16/644 on UCITS depositaries"