Assets or liabilities? Custodian risk in the new paradigm

Bill Scrimgeour, Global Head of Regulatory and Industry Affairs, HSBC Securities Services

Abstract
The Alternative Investment Fund Management Directive was passed by the European Parliament in July 2011 and will become law by the end of 2013. The European Securities and Markets Authority issued its Level 2 Implementation Measures Consultation Paper recently to provide detailed clarification around more difficult concepts. Designed to regulate hedge and private equity funds, it encompasses any non-UCITS fund (bar some exceptions). At its heart is the need for every fund sold into Europe after 2018 to appoint a depositary (similar to, but not the same as, a UK trustee) which will bear fiduciary responsibility. This is a new phenomenon to alternatives and no-one yet has a clear idea of how it will operate or what the cost will be. What is known is the depositary will carry an obligation to investors to replace assets held in a securities account that are lost, with a legal onus to prove that it took every possible course of action to avoid loss if it wishes to avoid liability. The deep-pockets principle springs to mind. This, together with other onerous oversight responsibilities, is a long way from industry practice. The article explores the potential impact of a depositary liability too strict for industry participants.

Keywords
Alternative Investment fund Management Directive (AIFMD), depositary, hedge, fiduciary, liability, strict, oversight, European Securities and Markets Authority (ESMA)

Bill Scrimgeour is Global Head of Regulatory and Industry Affairs at HSBC Securities Services, which provides middle and back office services to asset managers around the world, including depositary and custodian services, among others. He is an Asian specialist, having spent 25 years of his career in international banking in the region, and an expert in fund regulation following his return to London with HSBC in 2008 to start his current role, immediately prior to the global financial crisis. Regulatory and Industry Affairs within HSBC Securities Services was established to be a forward looking, strategic-thinking unit, capable of assessing the business impact of various changes in both regulation and industry, to enable the business to align itself to the changes. His biggest challenge is the extent of regulatory change in the asset management world, particularly in Europe.

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