UCITS V Regulation On Depositaries' Obligations Comes Into Force

The Commission's delegated regulation (EU) 2016/438 of December 17, 2015, which updates the UCITS regime provisions on the obligations of depositaries, has taken effect as of October 13. The UCITS V Level 2 regulation sets out detailed uniform rules in particular regarding the duties of the depositaries of UCITS funds.

The regulation lays down requirements regarding depositaries' duties, delegation arrangements and the liability regime for UCITS assets under custody, designed to provide a high level of investor protection.

Written agreement

To ensure that the depositary performs its duties properly, the regulation provides a detailed list of all the elements to be included in the written depositary contract. It should notably provide adequate detail on the categories of financial instruments in which the UCITS may invest and the geographical regions where investments may be made.

In addition, the contract should set out the escalation procedure to be followed should any discrepancies be detected, including notification of the management company or investment company, and provide for termination of the agreement as a last resort if the depositary believes the required level of investment protection is not ensured.

Depositary's duties

The regulation states that as a rule, the depositary must perform four types of duty. With regard to oversight, it must ensure consistency between the number of shares or units issued and the subscription proceeds received, ensure that appropriate valuation policies and procedures for the assets of the UCITS are effectively implemented, verify the fund's compliance with applicable law and regulations as well as its rules and instruments of incorporation, and check that its income is calculated accurately.

As part of its cash monitoring duties, the depositary must maintain a clear overview of all inflows and outflows of cash and maintain periodically updated procedures for monitoring of the UCITS' cash flows. It should also ensure that all payments made by investors for subscription to the shares or units of the UCITS have been received and booked in one or more cash accounts.

Its safekeeping duties include keeping in custody all financial instruments held by the UCITS that may be registered or held in an account directly or indirectly in the name of the depositary or a third party to which safekeeping functions are delegated. For assets that are not financial instruments...