Irish fund admins providing safekeeping of other assets need custody authorisation

Fund Administration
11 Mar, 2014

The Central Bank of Ireland (CBI) has confirmed in a consultation paper that fund administrators providing safekeeping of other assets must have a custody authorisation, although firms providing cash-flow monitoring and oversight will continue to be unregulated.

The announcement is a set-back for Ireland-based independent fund administrators which had hoped to offer a one-stop shop for depository-lite services.  “The CBI has confirmed that firms providing asset verification duties under Article 21(8)(b)  of the Alternative Investment Fund Managers Directive (AIFMD) must have a custody authorisation if they are servicing other assets such as over-the-counter derivatives. Running a separate regulated entity just for depository-lite could be costly for independent fund administrators and firms that had hoped to be able to provide a full depository-lite solution may reconsider their plans,” said Bill Prew, founder of INDOS Financial, an independent depository. 

Given the majority of hedge funds will have other assets in their portfolios, it is likely to force them to appoint a standalone bank with a custodial license to act as depository-lite in Ireland. This could force some hedge fund managers, which have submitted their Variation of Permission (VOP) forms to redo their application if they feel an obligation to change their depository-lite provider, said Prew.

“The CBI’s stance does vindicate the approach taken by administrators seeking authorisation with the UK Financial Conduct Authority (FCA), which is regulating all depository-lite activities. These firms should be able to provide a one-stop shop for depository lite services,” commented Prew.

The CBI’s consultation also urged depository-lites providing independent oversight and cash flow monitoring to ensure there are strict Chinese Walls in place with their parent companies. However, the CBI said it would not regulate depository-lites providing cash-flow monitoring or oversight services. There are concerns this laissez-faire approach could be found wanting, while others have warned the CBI’s reputation could be tarnished if an unregulated Irish depository-lite failed to spot a fraud or blow-up.

Many Irish fund administrators, which collectively oversee approximately $1 trillion in non-EU fund assets, have complained the CBI’s approach to depo-lites has been muddled. Under Article 36 of AIFMD, depo-lites are exempted from the strict liability provisions of loss of assets which has prompted a number of standalone fund administrators, such as Centaur Fund Services and SS&C GlobeOp, to launch offerings.

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 require 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 performing the depo-lite function.

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 its position on the AIFMD marketing passport in 2015.




Central Bank of Irelanddepository litesINDOS FinancialVOPFCA AIFMD