The ABBL welcomes the agreement reached on depositaries of Alternative Investment Funds

Nearly two years after the publication of the official proposal, EU co-legislators have recently endorsed the agreement reached on the revision of the Directive on Alternative Investment Funds Managers (hereafter the AIFMD).

Among the issues at stake, the rules governing the location of the depositary of Alternative Investment Funds (hereafter the AIFs) are highly relevant for the ABBL and its members depositary banks. While the current rule imposes that the AIF and its depositary must be located in the same jurisdiction, the review of the AIFMD has reactivated the discussion around a European passport for depositaries. The objective of this initiative was to resolve the issue faced by some EU Member States that fail to establish domestic depositaries, due to the limited size of their national market in AIFs.

Since the publication of the EU Commission proposal amending the AIFMD in November 2021, the ABBL has drawn the attention on the unexpected or unintended consequences of this proposal, which it fears would:

• Undermine efficient supervision due to the excessive complexification of the AIFs’ setup, where the supervisor, the management company and the depositary would potentially be located in three different jurisdictions;
• Weaken investors’ protection, because the depositary passport would create a situation where the investor will be confronted with again three jurisdictions, three supervisors, three different sets as investor protection frameworks, and potentially three different languages.

Against this background, the ABBL has been continuously advocating adequate safeguards against the introduction of a full passport for depositary banks at European level. Our position is fully reflected in the final agreement on AIFMD, which sets out that only EU countries with a national AIFs market size of less than EUR 50 billion will be allowed, under certain qualitative conditions, to appoint a foreign depositary.

Overall, the agreement provides a pragmatic solution to the issue faced by EU smaller markets for domiciled AIFs, while preserving the integrity of AIFs supervision and investor protection. In this respect, the agreement will be beneficial for the Luxembourg depositary banking activity, which is key in the value chain of asset servicing.

The agreement still needs to be formally confirmed by the Council and the Parliament before it can enter into force.

The agreement reached on the revision of AIFMD will be beneficial for the Luxembourg depositary banking activity, which is key in the value chain of asset servicing.