Appointing depositaries not wholly straightforward, says J.P. Morgan Prime Brokerage
Appointing a depositary might not be as straightforward as many managers assume, a senior executive at J.P. Morgan prime brokerage has cautioned.
Rules on depositaries yet to be clarified
AIFMD stipulates certain managers must appoint a depositary, most likely a major custodian bank, to oversee their funds and safeguard assets no later than July 2013.
“The rules have not been wholly finalised yet and there is a high probability that when they are, there will be a mad rush by managers to find a suitable depositary. If the process does not run smoothly, then this could lead to delays and it is not inconceivable that some managers might not meet the deadline,” said Kumar Panja, head of the prime brokerage consulting group for EMEA at J.P. Morgan in London.
Draft AIFMD proposals were supposed to be published in July 2012 but have been pushed back until September. These delays, coupled with the uncertainty about what the final rules will look like, have hindered managers’ preparations.
Formalising a relationship with a depositary could also take anywhere between two and three months although there is still confusion about how the process will work. “Appointing a depositary may take some time, which is why once managers determine that they are in-scope, they need to start work on this in good time. Depositaries will face challenges of their own in developing appropriate technology, legal agreements and conducting suitable due diligence, KYC and credit checks. This all takes time,” added Panja.
Some depositaries may even shun certain hedge funds, which they view as high risk, particularly as the depositary is liable for any losses held in custody and sub-custody. “Certain strategies, for example, trading securities in emerging or high-risk markets, may be at a disadvantage because the depositary is liable for losses in sub-custody and might not want the added risk associated with such strategies,” commented Panja.
Depositary liability has caused discomfort in the industry. Many depositaries have said it is unfair to be held accountable for events outside of their control such as fraud or insolvency at the sub-custody level. AIMA has estimated depositary liability could cost the industry up to $6 billion in a worst case scenario.