Ability to offer flexibility and independence under AIFMD
SuMi TRUST Global Asset Services provides sophisticated fund administration and custody services in the UK and Ireland and is backed by Sumitomo Mitsui Trust Bank Ltd (SMTB), the largest Trust Bank in Asia with over USD3tn in assets under custody.
David O’Keeffe (pictured) is the CEO of SMT Trustees (Ireland) Limited, the Irish Trustee/Custodian company. He notes that with SMTB’s A+ rating by Standard & Poor’s, a custodial network that extends into 100-plus markets, and the strength of a considerable balance sheet, SuMi TRUST can support alternative investment fund managers as they clamber to appoint a depository – either in an offshore or onshore capacity – under the Alternative Investment Fund Manager Directive (AIFMD).
Indeed, at the heart of its offering is the ability for SMT Trustees (Ireland) to give managers a degree of flexibility and independence that distinguish it from other depositories.
“We have near 20 years’ experience providing custody and trustee services, servicing both onshore European (UCITS and non-UCITS funds) and offshore funds such as Cayman funds through our subsidiary in Cayman. Consequently, AIFMD requirements are very close to what we already do when servicing UCITS funds in terms of providing depository services; it is the UCITS equivalent for alternative investment funds so our AIFMD solution will be very similar to what we already do for UCITS funds, especially with regards to the oversight function,” says O’Keeffe.
“We look to assist offshore funds to be able to continue to market to EU investors by providing the required key duties of a depository and to do as much of the heavy lifting for them in the process that we can. We can offer full depository services for managers who have funds onshore or, for their offshore funds, we can perform just one, two or all three of the key duties of a depository. That distinguishes us from a lot of the other depositories.”
Under AIFMD for an EU domiciled fund, the AIFM will need to arrange for the appointment of a single depository to carry out three key duties: cash flow monitoring, the safekeeping of assets, and general oversight. This single depository is also subject to a near strict liability for the loss of financial assets in their custody. However, for a non-EU domiciled fund intended to be marketed to EU investors, these same key duties are still required but the AIFM can appoint “one or more entities” to carry them out.
This flexibility in combining delegates where they can be appointed to carry out one or all of the three duties can assist in maintaining the existing relationship of the AIFM with their prime broker(s) and the fund administrator. For example one popular combination may be where the oversight role is undertaken by the depository, and the AIFM could then look to appoint their prime broker(s) to undertake the safekeeping duty leaving the cash flow monitoring to the administrator. This flexibility, coupled with a lower standard of depository liability is often referred to as a ‘depository lite’ model.
“A lot of depositories want to perform all three key duties for the manager under AIFMD but our aim is to be flexible wherever possible in meeting the needs of the manager. We are content to simply undertake the oversight duty alone if that’s what the manager wants. However, if they want us to safekeep the fund’s assets including record keeping which is a part of that duty, with or without cash flow monitoring, we will of course be delighted to assist in that regard; and we will do as much or as little as the manager needs. In fact we have clients appointing us for both models,” confirms O’Keeffe.
This is important because not all AIFMs will necessarily want all of their counterparty risk to be concentrated with one service provider. Whilst there are cost benefits to the manager, investors may not look favourably if there is a perceived lack of independent verification, particularly with respect to cash management and general oversight of the fund.
“It’s also not simply a case of managers wanting to know about the quality and integrity of the appointed depository but their investors are also interested; they want to know who is behind all this, who is looking after their interests? We work with a number of fund administrators independent of the SMTB group of companies, even though we have our own fund administration arm (SMT Fund Services (Ireland) Ltd). The fact that we have worked successfully with other administrators in direct competition with our own, highlights the level of independence we can bring to the AIFMs product offering.”
AIFMs have the choice of appointing SMT Trustees (Ireland) for any combination, if not for all, of the key duties of a depository in a depo-lite solution. It’s worth pointing out that for those managers who run offshore funds, the only additional cost involved may be limited to the appointment of an independent depository to perform the oversight function should the existing service providers absorb the remaining duties into their current costs; that is scheduled to last until after 2015, at which point it remains to be seen whether ESMA will insist on the AIFM having a single depository to undertake all the duties similar to the onshore model. The location of the depository may also become an issue as there may be a requirement to have the depository located in the same jurisdiction as the AIFM or the AIF itself. Nevertheless, SuMi TRUST is well positioned.
“This is something we can future-proof as we have related companies in various locations including Dublin, London, Luxembourg and Cayman,” says O’Keeffe.
With managers keen to get clarification from their service providers on precisely what they will or will not support under AIFMD, SMT Trustees is confident that its strong governance, flexibility and level of independence will go a long way to reassuring both clients and investors alike.” This is about establishing long-term relationships with managers,” states O’Keeffe.
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