ESMA Q&As:  Updates on Frequency of Depositary Reconciliations and Marketing Responsibility for AIFs and UCITS

PUBLISHED: 26th July 2022

On 20 July 2022, the European Securities and Markets Authority (ESMA) updated its Questions and Answers on the “Application of the AIFMD” and its Questions and Answers on the “Application of the UCITS Directive”. 

Key Clarifications

The following key clarifications were made in respect of the frequency of depositary reconciliations and marketing responsibility for AIFs and UCITS:

Depositaries (Frequency of Reconciliations)

• The frequency of depositary reconciliations depends on the frequency of trading, irrespective of dealing frequency.  If an AIF or UCITS with a weekly dealing frequency trades on a daily basis, daily reconciliations are required between the depositary’s internal accounts and records and those of any third party to whom safekeeping is delegated.
• A triparty collateral manager appointed by the asset manager also needs to be a delegate of the depositary and is required to transmit the end-of-day positions on a fund-by-fund basis or, if applicable, on a compartment-by-compartment basis.  This is in order to allow the depositary to record the end-of-day positions and verify that the quantity of the identified financial instruments recorded in the financial instruments accounts opened in its books matches the quantity of the identified financial instruments held in custody by the third party.

Delegation (Marketing)

• Marketing is one of the functions included in the management of funds and subject to the provisions on delegation under Article 13 of UCITS and Article 20 of AIFMD;
• The aim of the Cross Border Distribution of Funds Regulation is to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings and marketing communications addressed to investors under Article 4 (CBDF Rules); and
• When the marketing of an AIF or a UCITS is not performed by the AIFM or UCITS management company but by a third party distributor, the fund manager company is responsible for compliance with the CBDF Rules, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third party distributor (whether contractual or not).

Full Text of Updates to ESMA’s Questions and Answers

You will find below the full text of the new Q&As that have been included in the updated documents.

Updated Q&As on the application of the AIFMD | 20 July 2022

Section VI: Depositaries

Question 15: According to Article 89(1)(c) of Commission Delegated Regulation (EU) No 231/2013 as modified by Commission Delegated Regulation (EU) 2018/1618 and Article 13(1)(c) of Commission Delegated Regulation (EU) 2016/438 as modified by Commission Delegated Regulation (EU) 2018/1619 reconciliations are conducted as frequently as necessary between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated. What does this mean for an AIF or UCITS with a weekly dealing frequency which trades on a daily basis?

Answer 15: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation. [The answers provided by the European Commission clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.]

The reconciliation frequency depends not only on the dealing frequency of the relevant AIF or UCITS, but also on any trade which occurs even outside the dealing frequency. Therefore, if an AIF or UCITS with a weekly dealing frequency trades on a daily basis, daily reconciliations are required.

Question 16: According to Article 89(1)(c) of Commission Delegated Regulation (EU) No 231/2013 as modified by Commission Delegated Regulation (EU) 2018/1618 and Article 13(1)(c) of Commission Delegated Regulation (EU) 2016/438 as modified by Commission Delegated Regulation (EU) 2018/1619 reconciliations are conducted as frequently as necessary between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated. What does this mean in case of use of a tri-party collateral manager, which is not the depositary?

Answer 16: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation.

In this case the tri-party collateral manager is appointed by the asset manager in accordance with Article 20 of Directive 2011/61/EU or in accordance with Article 13 of Directive 2009/65/EC; it also needs to be the delegate of the depositary in accordance with Article 21(11) of Directive 2011/61/EU or in accordance with Article 22a(2) of Directive 2009/65/EC. The triparty collateral manager is required to transmit the end-of-day positions on a fund-by-fund basis or, if applicable, on a compartment-by-compartment basis. The information provided allows the depositary to record the end-of-day positions and allows it to comply with the provisions (a) of Article 98(2a)(a) (as inserted by Delegated Regulation (EU) 2018/1618) and in particular point (ii) thereof, and (b) with the provisions under Article 15(2a)(a) (as inserted by Delegated Regulation (EU) 2018/1619), and in particular point (ii) thereof. Thus, the information provided allows the depositary (for both Regulations) to verify that the quantity of the identified financial instruments recorded in the financial instruments accounts opened in its books matches the quantity of the identified financial instruments held in custody by the third party.

Section VIII: Delegation

Question 4: When the marketing of an AIF or a UCITS is not performed by the AIFM or UCITS management company but by a third party distributor, does the responsibility for ensuring that marketing communications comply with the requirements set out in Article 4(1) of Regulation (EU) 2019/1156 lie with the AIFM or the UCITS management company where there is a contractual relationship between the AIFM or the UCITS management company and the third party distributor? Conversely, does the responsibility for ensuring that marketing communications comply with the requirements set out in Article 4(1) of Regulation (EU) 2019/1156 still lie with the AIFM or the UCITS management company in case there is no contractual relationship with the third party distributor?

Answer 4: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation.

Marketing is one of the functions included in the management of funds, and therefore subject to the provisions on delegation (Article 13 of Directive 2009/65/EC and Article 20 of Directive 2011/61/EU), which themselves govern the conditions for that delegation under the principle of full responsibility of fund managers. Article 1 of Regulation (EU) 2019/1156 specifies that the aim of this Regulation is to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings and on marketing communications addressed to investors. These requirements are laid down in Article 4 of this Regulation, and are further clarified in ESMA Guidelines. Fund managers are responsible for the compliance with Article 4 of Regulation (EU) 2019/1156, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third party distributor (whether it is contractual or not).

Updated Q&As on the application of the UCITS Directive | 20 July 2022

Section X – Depositary

Question 7: According to Article 89(1)(c) of Commission Delegated Regulation (EU) No 231/2013 as modified by Commission Delegated Regulation (EU) 2018/1618 and Article 13(1)(c) of Commission Delegated Regulation (EU) 2016/438 as modified by Commission Delegated Regulation (EU) 2018/1619 reconciliations are conducted as frequently as necessary between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated. What does this mean for an AIF or UCITS with a weekly dealing frequency which trades on a daily basis?

Answer 7: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation.

The reconciliation frequency depends not only on the dealing frequency of the relevant AIF or UCITS, but also on any trade which occurs even outside the dealing frequency. Therefore, if an AIF or UCITS with a weekly dealing frequency trades on a daily basis, daily reconciliations are required.”

Question 8: According to Article 89(1)(c) of Commission Delegated Regulation (EU) No 231/2013 as modified by Commission Delegated Regulation (EU) 2018/1618 and Article 13(1)(c) of Commission Delegated Regulation (EU) 2016/438 as modified by Commission Delegated Regulation (EU) 2018/1619 reconciliations are conducted as frequently as necessary between the depositary’s internal accounts and records and those of any third party to whom safekeeping has been delegated. What does this mean in case of use of a tri-party collateral manager, which is not the depositary?

Answer 8: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation.

In this case the tri-party collateral manager is appointed by the asset manager in accordance with Article 20 of Directive 2011/61/EU or in accordance with Article 13 of Directive 2009/65/EC; it also needs to be the delegate of the depositary in accordance with Article 21(11) of Directive 2011/61/EU or in accordance with Article 22a(2) of Directive 2009/65/EC. The triparty collateral manager is required to transmit the end-of-day positions on a fund-by-fund basis or, if applicable, on a compartment-by-compartment basis. The information provided allows the depositary to record the end-of-day positions and allows it to comply with the provisions (a) of Article 98(2a)(a) (as inserted by Delegated Regulation (EU) 2018/1618) and in particular point (ii) thereof, and (b) with the provisions under Article 15(2a)(a) (as inserted by Delegated Regulation (EU) 2018/1619), and in particular point (ii) thereof. Thus, the information provided allows the depositary (for both Regulations) to verify that the quantity of the identified financial instruments recorded in the financial instruments accounts opened in its books matches the quantity of the identified financial instruments held in custody by the third party.”

Section XIII – Delegation

Question 1: When the marketing of an AIF or a UCITS is not performed by the AIFM or UCITS management company but by a third party distributor, does the responsibility for ensuring that marketing communications comply with the requirements set out in Article 4(1) of Regulation (EU) 2019/1156 lie with the AIFM or the UCITS management company where there is a contractual relationship between the AIFM or the UCITS management company and the third party distributor? Conversely, does the responsibility for ensuring that marketing communications comply with the requirements set out in Article 4(1) of Regulation (EU) 2019/1156 still lie with the AIFM or the UCITS management company in case there is no contractual relationship with the third party distributor?

Answer 1: Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation.

Marketing is one of the functions included in the management of funds, and therefore subject to the provisions on delegation (Article 13 of Directive 2009/65/EC and Article 20 of Directive 2011/61/EU), which themselves govern the conditions for that delegation under the principle of full responsibility of fund managers. Article 1 of Regulation (EU) 2019/1156 specifies that the aim of this Regulation is to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings and on marketing communications addressed to investors. These requirements are laid down in Article 4 of this Regulation, and are further clarified in ESMA Guidelines. Fund managers are responsible for the compliance with Article 4 of Regulation (EU) 2019/1156, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third party distributor (whether it is contractual or not).”

Comment

The aforementioned helpful updates to ESMA’s Q&As on the “Application of the AIFMD” and the “Application of the UCITS Directive” can be summarised as follows:

1. The frequency of depositary reconciliations depends on the frequency of trading, irrespective of dealing frequency; and the tri-party collateral manager (i) needs to be a delegate of the depositary; and (ii) is required to transmit end-of-day positions on a fund-by-fund or compartment-by-compartment basis.  
2. Fund managers are responsible for compliance with the CBDF Rules, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third party distributor (whether contractual or not).

Further Information

Please get in touch with a member of the Financial Services team at LK Shields Solicitors LLP should you require further information or assistance in relation to any of ESMA’s Q&As.