Centaur launches depo-lite
Centaur, a Dublin-based independent fund administrator, has launched a depository-lite for managers of non-EU funds hoping to take advantage of national private placement regimes under the Alternative Investment Fund Managers Directive (AIFMD).
Centaur Financial Limited will be set up as an independent company and will be responsible for carrying out cash flow monitoring and oversight services. Under Article 36 of AIFMD, depo-lites are exempted from the strict liability provisions for loss of assets, which has prompted a number of standalone fund administrators to consider launching such offerings. “We have signed up several fund managers, some of which use Centaur as their administrator and some of which use third party administrators,” said Louise Boyle, monitoring and oversight officer at Centaur Financial Limited.
SS&C GlobeOp recently confirmed it was seeking regulatory approval from the UK’s Financial Conduct Authority (FCA) to set up a depo-lite. SS&C GlobeOp hopes to obtain approval between December 2013 and January 2014 and will run the depo-lite as a separate subsidiary which will perform what is largely a trustee role. HedgeServ is also reported to be considering whether to establish a depo-lite. At present, the only independent entity providing depo-lite is INDOS Financial, a firm established by Bill Prew, a former chief operating officer at James Caird Asset Management.
Despite being the jurisdiction of choice to a vast number of hedge fund administrators, the Central Bank of Ireland has remained muted as to whether it will allow these organisations to establish depo-lites. Speaking at the GAIM Ops International conference in Paris last month, Martin Maloney, head of markets policy at the Central Bank of Ireland, said standalone fund administrators would have to provide comfort to regulators that they can manage any conflicts of interest or capacity issues should they establish a depo-lite. Maloney said the regulator was engaged in conversations with fund administrators, adding guidance would be issued shortly. The copious lack of clarity on the issue in Ireland is a cause for concern though.
“I think there is a real risk the Central Bank of Ireland will in time require Irish firms to be regulated to undertake depo-lite duties. Given there is over $1 trillion of non-Irish, non-EU alternative investment fund Assets under Management (AuM) administered by Irish administrators, there must be concerns about unregulated Irish entities undertaking fiduciary activities over this level of assets. There are clearly reputational risks to the Irish industry and without regulating these activities, how can appropriate standards be set and enforced across the board? We already see differences between regulatory standards for trustee or depository activities across Europe and these will be magnified where depo-lite businesses are not subjected to appropriate regulatory oversight,” said Bill Prew of INDOS.
Managers hoping to become AIFMs must submit a variation of permission (VOP) application to the FCA by January 22, 2014 and to the Central Bank of Ireland by February 21, 2014, where among many other points, the manager must confirm their depository or depo-lite appointment was made after full operational due diligence. “The onus is squarely on managers to perform appropriate due diligence over providers and I expect many managers and their directors and investors will ultimately question the suitability of unregulated firms performing an important fiduciary function,” commented Prew.
While depo-lites are shielded from the strict liability provisions of AIFMD contained in Article 21, this does not exempt them from liability through negligence. The FCA does force these firms to adhere to basic capital requirements and maintain extensive insurance coverage although many institutional investors would probably feel more comfortable with a bank-backed depositary equipped with a sizeable balance sheet. Furthermore, there is a possibility the European Securities and Markets Authority (ESMA) could force all non-EU hedge funds marketing to EU investors to be compliant with the full depositary regime under Article 21 when it reviews AIFMD in 2015.