On 26 September 2014, ESMA published a consultation paper in response to a request from the European Commission for technical advice on:

  • The insolvency protection of UCITS assets when delegating safekeeping
  • The requirement for the management company / self-managed investment company and the depositary to act independently

The Insolvency Protection

UCITS V requires that the safe-keeping of UCITS assets may only be delegated by a depositary to third parties who ensure that such assets are at all times adequately segregated from their own assets and from the assets of the depositary itself.

ESMA proposes, therefore, that such third-party delegates, if based outside the EU, must make all reasonable efforts, including the receipt of independent legal advice, to verify that the applicable insolvency laws of their relevant jurisdiction:

  • Recognise the segregation of the UCITS’ assets from the third party’s own assets and from the assets of the depositary
  • Recognise that the UCITS’ segregated assets do not form part of the third party’s estate in the case of insolvency and are unavailable for distribution among or realisation for the benefit of its creditors

In confining this requirement to non-EU based third-party delegates, ESMA notes that insolvency laws within the EU are expected to provide that assets of a UCITS cannot, in the case of insolvency, be distributed to the creditors of a third-party delegate located in the EU.

In developing its advice on this issue, ESMA also proposes adopting certain of the principles reflected in the recent Recommendations Regarding the Protection of Client Assets issued by IOSCO in January 2014.

The Independence Requirement

ESMA considers that the independence of the management company / self-managed investment company and the depositary (Relevant Parties), may be jeopardised by the existence of the following links between these parties:

  • Common management/supervision
  • Cross-shareholdings

Common Management / Supervision

In order to address the issue of common management/supervision, ESMA is proposing that the management bodies of the Relevant Parties should not have members in common, nor should any employee of one of the Relevant Parties be a member of the management body of the other.


Most controversial of all the proposals included in the consultation, are those intended to address the issue of cross-shareholdings.

In this regard, ESMA has chosen to consult on two options, the first of which contemplates that the Relevant Parties will not be considered as independent wherever they are connected by a qualifying holding or are part of the same group.

A ‘qualifying holding’ in this context means a direct or indirect holding by either entity in the other which represents 10% or more of the capital or the voting rights or which makes it possible to exercise a significant influence over the management of the entity in which the shares are held. Additionally, the Relevant Parties will be considered to be part of the same group where they are included in the same group for the purposes of consolidated accounts, as defined the European Accounting Directive or in accordance with recognised international accounting rules. The Accounting Directive defines the notion of a group as “[…] a parent undertaking and all its subsidiary undertakings.”

As it is common in most EU Member States for UCITS management companies and their depositaries to have either a common parent or a cross-shareholding that amounts to a ‘qualifying holding’, ESMA recognises that this option may lead “[…] to material additional costs for market participants”, either as a result of group re-structuring or because different depositaries will need to be appointed.

The second option being considered by ESMA in this context permits UCITS management companies/investment companies to be considered independent of their depositaries despite being linked by ‘qualifying holdings’ or forming part of the same group provided certain additional safeguards, such as robust conflicts of interest procedures, are put in place. Additionally, in cases where the management company/investment company and the depositary are part of the same group, at least one third of the members of the management bodies of both entities will be required to be independent of the group.

Consultation Feedback

Feedback to the consultation is requested by 24 October with a view to ESMA submitting its technical advice to the Commission by the end of November 2014.