Article 36 of AIFMD - Depositary Requirements Guidance Notes (November 2021)

Summary

These guidance notes explain how Article 36 of the EU's Alternative Investment Fund Managers Directive (AIFMD) interacts with Guernsey's existing regulatory regime for collective investment schemes. Article 36 allows an EEA AIFM to market a non-EEA AIF to professional investors in the EEA, provided one or more entities are appointed to perform cash monitoring, safekeeping of assets, and oversight duties (the Article 36 Services). The Commission sets out its expectations for Guernsey-licensed custodians (Guernsey Depositaries) that choose to provide these services on a contractual basis to an EEA AIFM.

• Scope of application: Applies to Guernsey-licensed custody providers acting as depositaries for non-EEA AIFs with an EEA AIFM under Article 36, and to Designated Custodians/Trustees and Designated Administrators of Guernsey authorised or registered open-ended and closed-ended collective investment schemes.
• Cash monitoring: Depositaries must ensure AIF cash flows are properly monitored, subscription monies are received and booked correctly, and reconciliations performed daily (or as movements occur), with a full review at least annually.
• Safekeeping of assets: Financial instruments must be held in custody and properly registered in segregated accounts; ownership of other assets must be verified and records kept up to date.
• Oversight duties: Depositaries must monitor compliance with investment restrictions and leverage limits, operate an escalation procedure for breaches, monitor timely settlement of AIF transactions, and check income/dividend calculations.
• Risk-based initial assessment: At appointment, the Guernsey Depositary should carry out and document a written risk assessment of the AIF's strategy and the AIFM's organisation to determine the level of due diligence and periodic controls needed, and keep it under regular review.
• Open-ended schemes: A locally licensed Designated Custodian/Trustee must generally be appointed (except under the Flexible Hedge Fund Policy), and existing pricing controls guidance continues to apply.
• Closed-ended schemes: No custodian appointment is required provided the prospectus clearly identifies who is responsible for safekeeping of assets; a Designated Administrator performing this role must be licensed to provide custody services under the POI Law.
• Notification to the Commission: A Guernsey Depositary must notify the Commission in writing forthwith upon commencing Article 36 depositary services, stating the commencement date, and submit an executed copy of the depositary agreement with the EEA AIFM.

The Commission will take compliance with this guidance into account when assessing a licensee's ongoing compliance with the Minimum Criteria for Licensing under the POI Law, and will review risk assessments and service agreements as part of its on-site visit programme. For Class A, B or Q open-ended schemes, any change of Designated Custodian/Trustee should not proceed until the Commission has formally confirmed the new designation.

Key obligations

• Guernsey Depositaries appointed under Article 36 must perform cash monitoring, safekeeping of assets, and oversight duties in line with AIFMD Article 21(7), (8), (9) and the Level 2 Regulations.
• Depositaries must conduct and document, at appointment, an initial written risk assessment of the AIF's strategy and the AIFM's organisation, and keep it under regular review.
• Depositaries must perform cash flow reconciliations daily (or upon occurrence for infrequent movements) and conduct a full reconciliation process review at least once a year.
• A Guernsey Depositary must notify the Commission in writing forthwith of its appointment and the date it commenced Article 36 depositary services, and submit an executed copy of the depositary agreement.
• A Designated Administrator providing safekeeping services for a closed-ended scheme must be licensed to provide custody services under the POI Law.
• For Class A, B or Q authorised or registered open-ended schemes, a change of Designated Custodian/Trustee should not occur until the Commission has formally confirmed the designation of the proposed new party.

Applies to

Guernsey Depositaries, EEA AIFMs, Designated Custodians/Trustees, Designated Administrators, authorised and registered open-ended collective investment schemes, authorised and registered closed-ended collective investment schemes

Deadlines

• forthwith upon appointment: Guernsey Depositary must give written notification to the Commission of the fact and date it commenced Article 36 depositary services, together with an executed copy of the depositary agreement.
• at least once a year: Full review of the cash reconciliation process must be conducted periodically, at minimum annually.