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In particular, we cover recent legislative proceedings at a European and national level as well as recent developments in regulation which have a practical impact on firms.

On 13 February 2015, the German Federal Financial Supervisory Authority (BaFin) published the long awaited “circular on the tasks and obligations of depositaries pursuant to the KAGB” for consultation. This circular will replace “circular 6/2010 on the tasks and obligations of a depository bank according to section 20 ff. German Investment Act” (depositary circular) currently in force. The circular discusses individual issues regarding the obligations of a depositary under the German Capital Investment Code (KAGB) in connection with the Commission Delegated Regulation (EU) No. 231/2013. The draft also includes the results of the “depositary circular” working group's discussions.

Compared to the current circular, the changes are substantial mainly to the amendments introduced by the implementation of AIFMD and the provisions of the KAGB. In addition to adjustments to the statutory requirements and the new terminology of the KAGB, the draft depositary circular provides clarification on BaFin's existing practice of interpretation, some of which had been considered to be highly controversial at the development stage.

Besides emphasising the key importance of the depositary as the controlling authority of the capital management company, the circular provides that the capital management company and the depositary should ensure that contracts entered into by them specify the high demands placed on equipment, functionality and economic viability. BaFin has expressly increased the requirements for the depositary´s business in many respects. Starting with the necessary qualification of managers whose “legal and economic expertise” now extends to the “legal and actual situation of those countries where the assets which are to be acquired for a fund would be located”, BaFin also explains in detail how the depositary´s control function may be exercised and, in this respect, regards a blocking notice as an adequate means of control also for AIF, however, without explicitly requiring such blocking notice.

But the current draft circular also implements many points which had been discussed in advance and clarifies a number of outstanding issues. While, for example, the term “property company” remains undefined, BaFin makes clear that securitisation vehicles do not qualify as property companies and, albeit the “look through” approach being, in principle, applicable, payment flows at the level of the property company need not be verified by the depositary. BaFin also discusses in detail the outsourcing of functions and again makes clear that only the decision about the commencement, scope and discontinuance of the issue of units in a fund is to be regarded as the primary responsibility of a capital management company and, consequently, only the takeover of the same by a third party can result in an outsourcing. The daily technical settlement can remain with the depositary and is not regarded as outsourcing on behalf of the capital management company.

What is not satisfactory, but, at present, probably cannot be changed, is that the requirements for sub-custody have not been definitively clarified. Here, BaFin refers to ESMA's still missing specification of the requirements for the account structure in the custody chain. The idea that a mere accounting segregation of assets could be sufficient has apparently dropped off the agenda. BaFin now refers to the opinion expressed by ESMA in its Consultation Paper “Guidelines on asset segregation under the AIFMD”, i.e. that only assets of the AIF of the same depositary may be held in safe custody in a single account. Then, reference is made to the still open questions raised in ESMA's Consultation Paper.

As expected, “collateral management” is not discussed in the draft circular and will probably be the subject of a separate guidance notice.

Other good news is that both model 1 and model 2 are maintained in the context of investment limit monitoring. While BaFin again makes clear that using model 1 must not result in a transfer of the control function, it further states that the depositary can use the accounting and monitoring system of the capital management company and do spot checks of the system's functionality.

In terms of UCITS, numerous references are made to the forthcoming changes introduced by the implementation of the UCITS V Directive, including the respective implementing measures which will particularly affect obligations in relation to the safe custody of financial instruments and other assets, the protection in case of the sub-depositary's insolvency and the exclusion of the exemption from liability for depositaries.  

Comments on the draft depositary circular must be submitted to BaFin in writing by 27 March 2015.

The Financial Services Team will keep you updated on further developments and would be happy to assist you in preparing for the implementation of the new requirements.