Question 4

Will we see convergence of AIF and UCITS regulation? Will this result in a single rulebook?

This was a question that provoked a lot of interesting debate throughout the European roadshow. It is fair to say that there is already a degree of convergence between the two regulatory rulebooks. There are, for example, similar characteristics for the Management Company under UCITS V and AIFMD in terms of capital requirements, internal governance, risk management rules etc., and there are now similar characteristics with remuneration.

Whilst a single rulebook in terms of the responsibilities placed on asset servicers and fund managers would be beneficial to depositaries, one cannot expect to see any sort of convergence between UCITS V and AIFMD with respect to fund-level regulations. In fact, there is likely to be regulatory divergence if, in future, AIFMD II does take a more modular approach to how it treats different AIFs (PERE funds versus hedge funds).

“Convergence, when it comes to the Manager and the Depositary is advantageous and is there to some degree already, but uniformity should not be the goal from a product perspective,” said Ruddy.

The feeling in both Italy and London was that regulation for alternative fund products and retail products remains “fundamentally different” and that the gap could indeed widen going forward. In Milan, Antonio Napolitano was adamant in saying: “I don’t see a single regulatory rulebook happening. But I do foresee more regulation on the product side under AIFMD II.”

Indeed, the fact that the rules of conduct are different, the definition of eligible assets is different, leverage and concentration limits and liquidity provisions are different makes it difficult to see how the regulatory rules on UCITS and AIFs could converge.

Anne-Sophie Minaldo was quick to point out that, product regulation aside, the liability regime is much stricter under UCITS V compared to AIFMD.

A key debate at the moment is that if you accept delegation for the safekeeping of assets outside Europe – requiring the depositary to interact with a third country - how can you be sure that country has the same insolvency laws in place? Who pays for the legal opinion; the fund manager or the depositary sub-delegating the safekeeping of assets?

“The liability regime will remain stricter for UCITS V and therefore I don’t agree that there should be a single rulebook,” stated Minaldo.

To further clarify, under UCITS V the depositary will be required to update the insolvency rules on any third country sub-custodial agreements it has in place as the depositary will be responsible for the segregation and oversight of assets across the custodial chain. “Our network will have to request these insolvency rules on an ongoing basis and if there are changes, we need to provide them to the asset manager. This places a huge amount of work on the depositary,” said Serge Balatre, Head of Business Development, Depositary Services, SGSS.

Under AIFMD, the appointed depositary to an onshore AIF is required to perform full depositary services but the AIFM is allowed to delegate the safekeeping of assets, and cash management, to their existing Prime Broker(s) and Administrator.

One of the concerns that came out of the audience both in London and Zurich was whether the requirement for full segregation of assets under UCITS V could eventually apply to AIFMD. This is something that AIFMs and prime brokers are pushing against.

With AIFMD we had to segregate assets in three big blocks as the appointed depositary: all assets, order assets and real assets. For UCITS V we had to segregate in four blocks. We created and sent out new instructions to our custodial counterparts requiring them to segregate assets accordingly. Even with our two Central Securities Depositaries (Euroclear and Clearstream) we are asking them to segregate the assets.

The issue with segregating assets under AIFMD is that prime brokers say it will be costly. It comes down to their having a different interpretation on segregating the assets. Their interpretation is that they already segregate through books and records from the omnibus account. We are waiting for ESMA to explain what the rule should be,” explained Balatre.

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