GAIM Ops Paris: Central Bank of Ireland warns fund admins on launching depo-lites
Standalone fund administrators must prove they have no conflicts of interest if they want to obtain regulatory approval to launch depo-lite businesses, the Central Bank of Ireland has warned.
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 grant regulatory approval to these organisations to set up depo-lites.
“Entities that want to engage in providing depositary oversight in Ireland under AIFMD need to have a conversation with us and explain how they can engage in this activity and prove that they have got the capacity and capabilities to deal with any conflicts of interest that may arise. This is quite a challenging question for some administrators,” said Martin Moloney, head of markets policy at the Central Bank of Ireland.
There are doubts some of the smaller standalone fund administrators contemplating a move into the depo-lite model would be capable of showing that their depo-lites are truly independent in their oversight roles.
Moloney also said the Central Bank of Ireland was discussing the situation with fund administrators and would issue guidance shortly. One delegate said the continued silence at the Central Bank of Ireland was very disappointing given the proximity of AIFMD’s implementation and submission deadlines. Last week, the Central Bank of Ireland urged firms hoping to become authorised as AIFMs to submit their applications by February, 21 2014.
Managers must identify their depositary or depo-lite in their submissions 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 depo-lites. Regulators have therefore been urged to hurry up and confirm their position on depo-lites.
If the Central Bank of Ireland refuses to give approval to fund administrators launching depo-lites, those administrators could be forced to seek regulatory approval from the FCA. Again, this could be a challenge as the UK regulator would have precious little time to approve these businesses, with it being unlikely that the process would be completed prior to managers’ submissions of their Variation of Permission (VOP) applications in January 2014.
Nonetheless, the delegate thought the Central Bank of Ireland would probably follow the UK’s example on depo-lites.
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.
SS&C GlobeOp recently confirmed it was seeking regulatory approval from the FCA to set up a depo-lite. SS&C GlobeOp hopes to obtain approval between December 2013 and January 2014 and will the run the depo-lite as a separate subsidiary and 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 in London.
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.