A recent Edhec position paper has welcomed the European Commission’s consultation on the Ucits depositary function, but stresses that an in-depth study of the regulations and practices of those who are part of the value chain is necessary.

The two authors - Noël Amenc, director of Edhec-Risk Institute and professor of finance at Edhec, and Samuel Sender, director of applied research at Edhec-Risk - also believe that above a protective floor offered to non-qualified investors, protection should be optional, and this protection should be subject to a cost-benefit analysis.

Say Amenc and Sender: “The European Commission consultations on the Ucits depositary function and on the proposal for a directive on alternative investment funds managers, known as the AIFM directive, should be placed in the context of the single European market and of the Ucits directives for investment funds: the establishment of a single market requires harmonisation of the rules; domestic laws and practices must be, as it were, born again.

“AIFM regulation may seem a natural extension to the alternative universe of Ucits regulation, which has above all to do with funds meant for retail investors (in other words, for individual investors). But the Ucits directives did not clarify the depositary role, and it is the Madoff fraud and the Lehman bankruptcy that have highlighted the disparities in domestic regulations on depositaries and thus the degrees of protection afforded investment firms and end-investors: in some countries, but not in others, depositaries were obliged to return the assets for which Madoff served as sub-custodian or which were held or re-used by the prime broker Lehman.

“The determination to protect investors and to harmonise inherent to Ucits regulation requires clarification of the role of the depositary and harmonisation of the obligations to which it is subject.

“Nonetheless, the crisis has above all shown that great risks, for which the asset management industry was unprepared, could come to pass, and for the European Commission the logical approach would be to do an in-depth study—to which the European Commission consultation contributes—of the non-financial risks weighing on those in the asset management industry and to identify the uncertainties as to responsibility and the possible absence of protection of investors or asset managers before drawing up proposals for directives.

“In this study the roles and responsibilities of the other parties to the industry value chain—distributors, asset management companies, depositary, custodians, valuators, administrators, auditors—should be clarified.

“Finally, any means of additional protection has a cost that can be likened to an insurance cost that must be borne by asset management firms and end-investors, an element that must be taken into account, as it has an impact on portfolio choices and thus on the investment market.”