IFIA responds to ESMA consultation on asset segregation under the AIFMD2 February 2015
OESMA outlined a number of options in its consultation paper and decided to propose two options for consideration:
- Option 1: AIF and non-AIF assets should not be mixed in the same account and there should be separate accounts for AIF assets of each depositary when a delegate is holding assets for multiple depositary clients.
- Option 2: The separation of AIF and non-AIF assets should be required, but it would be possible to combine AIF assets of multiple depositaries into a single account at sub-custodian level.
IFIA has responded that neither Option 1 nor Option 2 adequately reflects the variety of potential approaches to and the complexity of safe-keeping and recordkeeping of assets throughout the custody chain. Different interpretations can be applied principally because of the lack of clarity in the AIFMD framework where reference is made to ‘accounts’ in certain provisions and to ‘books and records’ in other provisions.
Both Options proposed by ESMA represent a dramatic increase in the cost and complexity of the custody system due to the extrapolation of accounts and associated reconciliations and it is not clear that either Option achieves the aim of enhancing investor protection in the event of bankruptcy of an underlying agent in the chain.
The key protection which should be the focus when assessing safekeeping arrangements is whether there are sufficient records maintained and reconciliations performed at each level of the custody chain such that the AIF’s assets can be readily identified at all times. IFIA therefore proposes an alternative approach to the Options outlined above, based on the maintenance of records, account opening and registration methodologies employed by CSDs, reconciliation practices and oversight and due diligence performed by each party in the custodial chain.