Luxembourg Regulator Updates Rules For UCITS Depositaries

Luxembourg's Financial Sector Supervisory Authority (CSSF) has issued on October 11, 2016 Circular 16/644, which sets out revised rules applicable to all Luxembourg credit institutions acting as depositary banks for UCITS funds as well as to all Luxembourg UCITS, including self-managed funds, and/or their management companies.

The circular sets out regulatory requirements clarifying rules under the updated Luxembourg investment fund law implementing the UCITS V directive, which came into force on June 1, and the European Commission's Level 2 delegated regulation EU2016/438 regarding the obligations of depositaries, as well as various other matters.

For the most part the rules detailed in the CSSF circular are supplementary to the revised UCITS regime, providing clarification in areas such as the organisational requirements relating to the chain of custody and detailing the duties and responsibilities of the designated UCITS depositary and any sub-custodians, as well as the depositary's responsibility for monitoring financial flows.

The circular covers eligibility criteria for UCITS depositaries, including human resources and technical capabilities, the process of regulatory approval by the CSSF, the contract designating a depositary, governance and organisational issues such as managing conflicts of interest, internal procedures regarding the depositary function, organisational matters regarding the safekeeping of assets, depositary functions in the case of assets that are not subject to safekeeping, due diligence regarding investment in other funds, the depositary's right of access to information required to fulfil its responsibilities, collateral management, the depositary's responsibilities regarding exchange-traded and OTC derivatives, reconciliation procedures, and business continuity management.

Further guidance is expected to be issued shortly by the CSSF on the degree of independence of a depositary in relation to a UCITS structured as an open-ended investment company (SICAV) managed by a Chapter 15 management company, as analysts have indentified a lack of detail in...