AIFMD

Thomas Murray spoke to HSBC's head of product solutions - regulatory change, Paul Ellis, about how the bank managed the implementation of UCITS V and the similarities with getting over the line with AIFMD, how this directive has impacted custody arrangements and what the future holds for the UCITS brand.

Segregation of assets in accounts that bear the name of the owner is one of the unstoppable regulatory and commercial trends of our time. While custodian banks have invested considerable resources in the development of ingenious arguments against segregation, one third party lender is pleasantly surprised to find concerns about asset safety are increasing the attractions of its business model.

For most investors, a planned and executed trade is the end of the affair. Once a counterparty has been found and the terms of the deal agreed, we assume we’ve addressed the risks we were looking to offset in changing the composition of the portfolio.

But what if risks lurk in the post-trade processing of our transaction? How do we know that securities and cash have moved correctly, that the change of ownership is recorded accurately and, once the movement has taken place, that our ownership rights are secure?

Anyone buying a European mutual fund now receives enhanced protection from custodial risks. Do institutional investors need to ask for equal treatment?

Under Europe’s Alternative Investment Funds Directive (AIFMD), which came into force in 2013, fund depositaries have to indemnify investors in the region’s hedge funds against possible losses caused by fraud or negligence at the level of the custodian or sub-custodian.

The £126 million fine levied by the UK Financial Conduct Authority (FCA) on BNY Mellon in April for breaches of the rules on the safekeeping of client assets was the latest in a series of similar sanctions.  The fine was the eighteenth penalty levied in four years on UK financial institutions for breaches of the UK’s custody rules (or “CASS”) regime, apparently highlighting a widespread industry problem.

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