Fund administrators too late on launching depo-lites

Fund Administration
08 Nov, 2013

Fund administrators planning to launch a depositary-lite are six months behind the game and unlikely to obtain regulatory approval in time for managers’ January 22, 2014 submission deadline for their Variation of Permission (VOP) applications with the UK’s Financial Conduct Authority (FCA) as mandated under the Alternative Investment Fund Managers Directive (AIFMD).

Several fund administrators are debating whether to launch depo-lites although SS&C GlobeOp confirmed it is in the process of seeking regulatory approval, which it hopes to obtain some-time between December 2013 and January 2014. The depo-lite will operate as a separate subsidiary to SS&C GlobeOp and will be responsible for the safekeeping of assets, cash flow monitoring and oversight in what is effectively a trustee role. HedgeServ is also reported to be considering whether to set up a depo-lite.  

“It appears to be a reactive and largely defensive step on the part of some fund administrators talking about launching depo-lites. Given the sheer volume of work it entails, such as sorting out legal documents and pricing, hiring experienced staff, defining processes, implementing systems, and at least for firms seeking FCA authorisation, obtaining regulatory authorisation, they are six months behind the game. A robust set up is not something which can be completed in a short period,” said one depositary.

Managers must also identify their depositary or depo-lite in their VOP submission and confirm the appointment was made after a full operational due diligence process at the beginning of next year giving these administrators precious little time to establish a depo-lite. However, the VOP submission date could be pushed back following a legal challenge by the City of London Law Society, which is accusing the FCA of setting an unrealistic deadline and gold-plating the directive. The challenge has divided the industry, and most doubt it will be successful.

Others have warned managers to avoid complacency when submitting their VOP. “There are some suggestions that managers can simply tick the box on the VOP stating they are relying on reverse solicitation and write down who their depositary or depo-lite is at a later date, but this does not appear to be mainstream advice. While I sympathise with managers facing a lack of clarity on depositary service offerings and terms, there is a risk the FCA could tell those managers they have an incomplete application, and that could lead to them being shunted to the back of the queue,” said Bill Prew, founder of INDOS Financial, an independent depo-lite in the final stages of FCA approval.

Another risk would be if the FCA finds a depo lite unsatisfactory for any reason, which could put a manager’s entire authorisation process in jeopardy leaving them with insufficient time to attain compliance by July 22, 2014.

INDOS Financial, added Prew, had been developing its depo-lite for more than one year now, and has already submitted formal proposals to more than 35 funds with collective Assets under Management (AuM) of just under $10 billion.

Under Article 36 of AIFMD, managers of non-EU hedge funds marketing through private placement to EU investors will be subject to less onerous depositary arrangements whereby strict liability for loss of assets does not apply to the depo-lite. It is expected the majority of offshore managers using private placement will adopt this model.

While depo-lites are shielded from the strict liability provisions of AIFMD under 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 in 2015.



AIFMDdepositary-liteINDOSSS&C GlobeOpFCA