ESMA updates its UCITS Q&As on delegation and supervision of depositary functions

On 04 June 2019, the European Securities and Markets Authority (ESMA) published a further update to its Q&As, Application of the UCITS Directive. The five new questions and answers all fall within Section X, ‘Depositaries’ and deal with the following issues:

New Q.2: Delegation of ‘supporting tasks’ to third parties

The UCITS Directive imposes strict limitations on the ability of depositaries to delegate the safekeeping of a UCITS’s assets, while delegation of the monitoring of the cash flow and oversight functions is not permitted.

By Recital 42 of the AIFMD, a depositary may, however, delegate “supporting tasks that are linked to its depositary tasks, such as administrative or technical functions performed by the depositary as a part of its depositary tasks”.

ESMA has now confirmed that, in the context of UCITS, delegation to third parties of “supporting tasks that are linked to depositary tasks such as administrative or technical functions performed as part of the depositary tasks listed under Article 22(3) and (4) of the UCITS Directive” is permitted, provided all of the following conditions are met:

• the execution of the tasks does not involve any discretionary judgement or interpretation by the third party in relation to the depositary functions
• the execution of the tasks does not require specific expertise in regard to the depositary function, and
• the tasks are standardised and pre-defined.

New Q.3: Entrusting depositary tasks to third parties

ESMA confirms that depositaries can entrust third parties with the performance of tasks that would give them the ability to transfer assets belonging to UCITS without the intervention of the depositary. In such a case, the arrangements are subject to the delegation requirements set out in Article 22a(2) of the UCITS Directive.

New Q.4: Performance of depositary functions by a branch in a different Member State

Where the UCITS depositary is a branch whose head office is in a Member State different from the UCITS’s home Member State and the branch wants to allocate its depositary functions to its head office, this must not lead to the establishment requirement under Article 23(1) of the UCITS Directive being circumvented.

As a result, the branch’s operational infrastructure and internal governance system must be adequate to carry out depositary functions autonomously from its head office and ensure compliance with national rules which implement the UCITS Directive.

New Q.5: Supervision of depositary functions performed by a branch with its head office in a different Member State

Where depositary functions are performed by a branch established in the UCITS’s home Member State (but where this is a different Member State from that of the depositary’s head office), ESMA states that the competent authority of the Member State where the branch is established should be responsible for supervising the branch’s activities with regard to UCITS depositary functions.

This includes supervision of how depositary functions are allocated between the branch and its head office (or vice versa) to avoid circumvention of the establishment requirement under Article 23(1) of the UCITS Directive.

New Q.6: Delegation by a depositary to another legal entity in the same group

ESMA’s new Q&A confirms that, where a depositary delegates some of its functions to another legal entity in the same group, this will be considered a delegation to a third party for the purposes of the depositary delegation rules under Article 22a of the UCITS Directive.