Leaked AIFMD text says depositaries must "implement" cash flow monitoring

Fund AdministrationRegulation
24 Oct, 2012

The latest AIFMD Level 2 requirements will force depositaries to “implement” cash flow monitoring in a move that could dramatically ramp up costs for hedge funds and asset managers, a person with access to a leaked copy of the text has said.

The previous text required depositaries to “ensure” the proper monitoring of cash flows in what would have been a largely supervisory role. The European Commission’s latest version will require them to take a more active role and in effect duplicate what the fund administrator is doing.

“The latest rules will require the depositary to act as a secondary administrator. They will be required to duplicate a lot of the work which the fund administrator is doing,” said the source.

The depositary will be necessitated to see that payments made to shares or units in an alternative investment fund manager are properly received as well as booking the AIF’s cash into more than one cash account.  “The proposals have absolutely no value add. In fact, the new rules will add to hedge fund costs,” said the source. Depositaries will now have to upgrade their technology and employ personnel to handle their newly created role. “This will all cost money,” said the source.

There is also a risk of potential conflicts of interest, particularly if the depositary is also an administrator to the fund. “Banks serving as depositaries which also have administration arms will most likely have Chinese walls which will ensure there is no conflict,” said the source. However, it does raise questions about what the depositary would do if it discovered errors made by the administrator within the same organisation.

Depositary reform contained in AIFMD has stirred emotions within the industry. Depositaries, most likely major custodian banks, must also  safeguard assets. They will be held liable for any losses incurred at the sub-custody level either through fraud or insolvency. AIMA has said this could cost up to $6 billion in a worst case scenario although this figure has been questioned.

AIFMDcash monitoringChinese wallscustodydepositaries