Depository community stress AIFM concerns

The AIFM's strict liability requirements for depositories is being viewed as harsh and potentially dangerous by panelists at a recent industry conference.

Despite intense lobbying from the depository industry, the European Commission has been “inflexible” in writing depository requirements under the Alternative Investment Fund Managers Directive (AIFM), according to panelists at ALFI's European Alternative Investment Funds Conference in Luxembourg.

The major concern for depositories is still the strict liability provisions, according to Jean-Michel Loehr, of RBC Investor Services.

“We will still be liable for losses due to acts committed by counterparties we have no control over and even counterparties we didn't appoint,” said Loehr.

This view was backed up by fellow panelist, Bill Scrimgeour, head of regulation at HSBC Securities Services, who said the depository might still have to pay up if fraud is committed by counterparties.

Another concern for depositories was cash monitoring requirements. According to Loehr this provision makes depositories a central hub for all cash movement which will lead to big operational challenges that will increase the cost for both the depository and the fund.

Indeed pricing was a contentious issue with the panel as Scrimgeour said the risks depositories will take have been “mispriced”.

“It was a volume game, but it has now become a risk game. It is an insurance policy that we don’t know exactly how to price at the moment,” he added.

When discussing fund administrators and other service providers taking on the role of the depository – which is expected to be cheaper than a specialist depository – the panelists issued a warning. “It's a question of substance at the end of the day,” said Scrimgeour. He said he was worried that cheaper services mean cheaper standards which goes against the investor protection aim of the directive.