CHAPTER IV

DEPOSITARY
SECTION 3

Depositary functions, due diligence duties and segregation obligation
...

Segregation obligation
Article 99
1
Where safekeeping functions have been delegated wholly or partly to a third party, a depositary shall ensure that the third party, to whom safe-keeping functions are delegated pursuant to
rules 3.11.28 to 3.11.30 of the Investment Funds sourcebook
, acts in accordance with the segregation obligation laid down in
rule 3.11.28(4)(c) of the Investment Funds sourcebook
by ensuring and verifying that the third party:
a
correctly records all identified financial instruments in the financial instruments account, which is opened in the third party's books, in order to hold in custody the financial instruments for the depositary's clients, which excludes proprietary financial instruments of the depositary and of the third party and of the third party's other clients, to enable the depositary to match the quantity of the identified financial instruments recorded in the accounts opened in the depositary's books in the name of each of its AIF clients or in the name of the AIFM acting on behalf of the AIF;
b
keeps all necessary records and financial instruments accounts to enable the depositary at any time and without delay to distinguish assets of the depositary's clients from the third party own assets, assets of the third party's other clients and assets held for the depositary for its own account;
c
maintains records and financial instruments accounts in a way that ensures their accuracy, and in particular their correspondence to the assets kept safe for the depositary's AIF clients and on the basis of which the depositary can at any time establish the precise nature, location and ownership status of those assets;
d
provides the depositary with a statement, on a regular basis and in any case whenever a change in circumstances occurs, detailing the assets of the depositary's AIF clients;
e
conducts reconciliations, as often as necessary, between its financial instruments accounts and internal records and those of the third party to whom it has delegated safe-keeping functions in accordance with Article 21(11) of Directive 2011/61/EU.
The frequency of the reconciliation shall be determined in accordance with Article 89(1);
f
introduces adequate organisational arrangements to minimise the risk of loss or diminution of financial instruments or of rights in connection with those financial instruments as a result of misuse of the financial instruments, fraud poor administration, inadequate record-keeping or negligence;
g
where the third party is an entity referred to in points (a), (b) and (c) of Article 18(1) of Directive 2006/73/EC, which is subject to effective prudential regulation and supervision that has the same effect as Union law and is effectively enforced, the depositary shall take the necessary steps to ensure that the AIF's cash is held in an account or accounts in accordance with Article 21(7) of Directive 2011/61/EU.
2
Where a depositary has delegated its custody functions to a third party in accordance with rules 3.11.28 to 3.11.30 of the Investment Funds sourcebook, the monitoring of the third party’s compliance with its segregation obligations shall ensure that the financial instruments belonging to its clients are protected from any insolvency of that third party. If, according to the applicable law, including in particular the law relating to property or insolvency, the requirements laid down in paragraph 1 are not sufficient to achieve that objective, the depositary shall assess what additional arrangements are to be made in order to minimise the risk of loss and maintain an adequate standard of protection.
2a
Where a depositary delegates its custody functions to a third party located in a third country in accordance with Article 21(11) of Directive 2011/61/EU, in addition to the requirements of paragraph 1 of this Article, the depositary shall ensure the following:
a
the depositary receives legal advice from an independent natural or legal person confirming that the applicable insolvency law recognises the following:
1. the segregation of the assets of the depositary's clients from the third party's own assets, from the assets of the third party's other clients and from the assets held by the third party for the depositary's own account;
2. the assets of the depositary's AIF clients do not form part of the third party's estate in case of insolvency;
3. the assets of the depositary's AIF clients are unavailable for distribution among, or realisation for the benefit of, creditors of the third party to whom custody functions have been delegated in accordance with Article 21(11) of Directive 2011/61/EU;
b
the third party takes the following steps:
1. it ensures that the conditions laid down in point (a) are met when concluding the delegation agreement with the depositary and on an ongoing basis for the entire duration of the delegation;
2. it immediately informs the depositary whenever any of the conditions referred to in point (i) are no longer met;
3. it informs the depositary about any changes to applicable insolvency law and its effective application.
3
Paragraphs 1, 2 and 2a shall apply
mutatis mutandis
when the third party, to whom safe-keeping functions are delegated in accordance with
rules 3.11.28 to 3.11.30 of the Investment Funds sourcebook
, has decided to delegate all or part of its safe-keeping functions to another third party pursuant to
rule 3.11.29 of the Investment Funds sourcebook
.
Substituted by Commission Delegated Regulation (EU) 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) No 231/2013 as regards safe-keeping duties of depositaries (Text with EEA relevance).
Inserted by Commission Delegated Regulation (EU) 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) No 231/2013 as regards safe-keeping duties of depositaries (Text with EEA relevance).
Words in Ch. 4 Section 3 heading omitted (31.12.2020) by virtue of The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(1) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 99(1) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(i)(aa) (as amended by S.I. 2019/325, reg. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 99(1) substituted (31.12.2020) by virtue of The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(i)(bb) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Art. 99(1)(c): By The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(ii) (as amended by S.I. 2019/325, regs. 1(3), 58) it is provided that (31.12.2020) the words “rule 3.11.29 of the Investment Funds sourcebook” are substituted for the words “the third subparagraph of Article 21(11) of Directive 2011/61/EU”; 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 99(2) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(b) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 99(3) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(c)(i) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 99(3) substituted (31.12.2020) by The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(c)(ii) (as amended by S.I. 2019/325, regs. 1(3), 58); 2020 c. 1, Sch. 5 para. 1(1)
Art. 99(1)(e): By The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(iii)(aa) (as amended by S.I. 2019/325, regs. 1(3), 58) it is provided that (31.12.2020) the words “paragraphs (1), (2) and (3) of rule 7.13.3 of the Client Assets sourcebook” are substituted for the words “points (a), (b) and (c) of Article 18(1) of Directive 2006/73/EC”; 2020 c. 1, Sch. 5 para. 1(1)
Art. 99(1)(e): By The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(iii)(bb) (as amended by S.I. 2019/325, regs. 1(3), 58) it is provided that (31.12.2020) the words “the law applicable in the United Kingdom, or in any part of the United Kingdom” are substituted for the words “Union law”; 2020 c. 1, Sch. 5 para. 1(1)
Art. 99(1)(e): By The Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/328), regs. 1(3), 34(16)(a)(iii)(cc) (as amended by S.I. 2019/325, regs. 1(3), 58) it is provided that (31.12.2020) the words “rule 3.11.20 of the Investment Funds sourcebook” are substituted for the words “Article 21(7) of Directive 2011/61/EU”; 2020 c. 1, Sch. 5 para. 1(1)