EU Asset Safekeeping Proposals Disrupt Reliance Model

Recently we urged asset managers to pay more attention to the normally unglamorous post-trade space. The timing now seems prescient because EU policymakers have since issued key asset segregation proposals with the potential to impact current UCITS and AIFMD funds significantly.

Since the financial crisis, global regulators have taken several steps to increase investor protection. Nowhere was this more evident than within the asset protection standards of the UCITS V and AIFMD depositary requirements. EU policymakers imposed onerous liability and asset protection standards upon EU regulated funds in order to ensure investors would never again be exposed to loss of assets experienced in 2008. Since implementation, the critical value and importance of having a robust depositary function attached to a UCITS or AIFs has become increasingly obvious to cross-border asset managers. Meanwhile those funds continue to flourish with inflows partially owing to the lofty investor protection standards inherent in their fund structures.

However, recent EU proposals to revise the UCITS and AIFMD asset safekeeping and segregation rules are causing apprehension. Regulators are looking to harmonize the requirements between the two types of funds and to ensure consistent application of arrangements across each EU jurisdiction. The industry is concerned about more stringent proposed record-keeping and reconciliation requirements for assets held along the chain of custody.

EU Asset Segregation Timeline

EU Asset Segregation Timeline

Reliance Model

In the age of Brexit, delegation models and reliance on appointed delegates have been key focus areas for global asset managers. Whilst in this case primarily impacting depositaries and their appointed delegates, the proposed changes have the potential to impose on both the activities and costs of asset managers indirectly.

The industry seeks to preserve the right to delegate registration and maintenance of books and records to duly appointed third parties. Asset records for UCITS and AIFs normally sit directly either at the depositary or at the delegate, but not with both. The use of common global record systems negates the requirement to replicate records. In fact, in practical terms the imposition of duplicate records would likely create additional confusion rather than efficiencies.

Additionally, elements of the draft proposals may create confusion on how to conduct reconciliations between the depositary and its delegate (and between the delegate and onward delegates) by tying frequency of reconciliations to managers’ trading activity. As such, the draft proposals risk being out of line with generally prevailing global best practice in this regard and have the potential to be operationally disruptive.

Mandated duplication of books and records would increase barriers to entry, reduce competition, and even cause some incumbents to exit. Many depositaries make use of this so-called “reliance model,” leaning on delegates such as a global custodian or appointed prime broker to discharge their regulatory recordkeeping duty.

Welcome Clarity on Omnibus Structures

The draft proposals also contain welcome clarity regarding omnibus accounts. The draft suggests some “additional safeguards….to contractually ensure a sufficient flow of information between the depositary and the custodian or sub-custodian,” however the current operational construct remains largely unchanged.

Such omnibus account assets must also be segregated on a fund-by-fund basis at the depositary level (this is already the case in practice). Also, within omnibus accounts, assets must be segregated from the delegate’s own assets, the own assets of the depositary and accounts for other direct clients of the delegate.


These draft proposals have been years in the making, and considering the UCITS and AIFMD asset safekeeping regulations have been in place already for several years, many depositaries have already implemented robust global record-keeping infrastructures. As such, disruption of these processes would add extra costs with no obvious benefits. At a time when global asset managers are already feeling the squeeze, any changes which are not additive to the UCITS and AIFMD brand would be unhelpful now. The industry is hopeful that EU policymakers recognize this and provide for retention of the reliance model.