At the end of 2014, the European Securities and Markets Authority (ESMA) consulted on draft guidelines on asset segregation under AIFMD, which offered two options. The majority of respondents strongly objected to these options and preferred other options mentioned in the cost benefit analysis. Also, the context of the issue has widened with the introduction of UCITS V. ESMA therefore re-consulted and asked for further evidence on what happens in practice within the depositary and custody industry. The policy aim is a regime that ensures assets are clearly identifiable as belonging to the UCITS or AIF and their ownership is not called into question in the event of an insolvency within the custody chain.
Both AIFMD and UCITS V include extensive provisions on the role of the depositary and, in particular, how it should go about its duty to safeguard the assets of the fund. In particular, the requirements on asset segregation are imposed mutatis mutandis along the custody chain.
In addition to feedback to ESMA’s previous consultation on draft guidelines for AIF depositaries, the issue of the regulation of asset segregation for funds was commented on in responses to the Commission’s Call for Evidence on post-crisis regulation.
The constraints to achieving complete asset segregation and ownership certainty are how to operate the requirements in the context of a necessarily global custody network and very different insolvency laws and practices, both within the EU and in other jurisdictions. Indeed, ESMA recognises that “A given type of segregation model intended to provide strong protection in jurisdiction X may in fact offer more, less or no change in protection if imposed on jurisdiction Y or Z”. The key question, therefore, is the optimal regime for achieving a strong level of investor protection without imposing requirements that make it operationally impractical.
The second consultation was largely an information gathering exercise and was wide-ranging:
No guidelines have yet been proposed. ESMA says it will use the feedback to conclude its work by the end of this year and, depending on the outcome of its analysis, it will consider the best approach.