ESMA opinion on asset segregation and application of depositary delegation rules to CSDs

Following a consultation paper issued on 1 December 2014 and a subsequent Call for Evidence on 15 July 2016, ESMA has now set out its opinion on asset segregation under AIFMD. The focus of the original ESMA consultation was the extent to which assets should be segregated throughout the custody chain for the purposes of investor protection rather than extensive use of omnibus accounts across the industry. The Indos comment on the original consultation can be read here.

ESMA presented several options in the original consultation but the clear majority of the 31 responses it received rejected the proposals. Thus, and given that UCITS V had recently been introduced and contained asset segregation requirements, ESMA carried out a further consultation. Included within its scope was how the depositary delegation rules should apply to Central Securities Depositaries (CSDs).

The final opinion confirms  the permissible use of omnibus accounts at the delegate, and removes the suggestion of having mandatory segregation at each level of the custody chain. It also specifies the minimum level of accounts that the depositary should hold at the delegate to achieve segregation and highlights the importance of regular reconciliations of these accounts.

It is noted that there is allowance for regulatory authorities to apply a different standard.

With respect to omnibus accounts there is useful discussion in the paper, highlighting legal opinion that segregation does not necessarily give greater protection in an insolvency, and the large costs associated with a full segregation at each level.

The opinion also seeks to clarify the conflict between AIFMD and UCITS as to whether the use of a CSD constitutes a delegation by the depositary. The opinion recognises the AIFMD definition that it is not a delegation relieving the depositary of due diligence responsibilities and strict liability for loss of assets for Issuer CSDs.

However, the opinion introduces the concept of Investor CSDs, whereby that CSD is operating in a similar capacity as a Global Custodian and has itself an account with an Issuer CSD. In this circumstance the opening of accounts by the depositary with an Investor CSD would be classed as a delegation.

In summary, ESMA has provided welcome clarification in this paper as to the continued use of omnibus accounts and the optimal approach to asset segregation in the custody chain, and how the depositary delegation rules should apply to CSDs.

Although ESMA concluded that only minimum EU-wide segregation requirements should be prescribed, it still leaves room for different account structures should national laws in specific Member States make them necessary.