CSSF Circular 14/587 – New Rules Applicable To Depositary Banks

On 15th July the Commission de Surveillance du Secteur Financier (the "CSSF") issued a new Circular 14/587 (the "Circular") which is applicable to UCITS' depositary banks and to the UCITS themselves regarding their relationship with their depositaries.

The aim of the Circular is to align the Requirements applicable to UCITS' depositaries with the requirements imposed by Directive 2011/61/EU on alternative investment fund managers ("AIFMD"). Such alignment anticipates the implementation of the UCITS V Directive into Luxembourg law.

The Circular will supersede the previous IML Circular91/75.Such new Circular represents a Shift from the previous "principle-based approach" to more stringent and detailed rules.

The Circular focuses on the four following points:

Asset segregation within the depositary In line with what is foreseen in UCITS V and in the AIFMD, the obligations to which the depositary bank is subject change according to the nature of the assets held in custody. Thus, a distinction has to be drawn between assets which are physically held by the depositary and those that are to be held by sub-depositaries or specialised third parties. In addition, the Circular introduces a new mechanism which foresees a level-by-level problem solving which involves the depositary, the fund's management company and the financial regulators in order to deal with the loss of assets in custody. Initial and continuing due diligence procedure on all sub-depositaries and other appointed service providers As stated above, the "principle-based approach" has been abandoned, so that the Circular now clarifies the minimum rules that must be included in a depositary's due diligence procedure. The requirements applicable to due diligence procedures include, among others, criteria which enable the depositary to...