The Luxembourg financial centre is well known for its service offering in the field of depositary banking and custodial services.
The main offer in this area in Luxembourg relates to custody services for investment funds. Indeed, investment funds are required by law (both on an EU and a Luxembourg level) to entrust the custody of their assets to a custodian/depositary bank. Luxembourg law requires that the depositary must be a bank within the meaning of the Luxembourg law of 5 April 1993 on the financial sector (as amended). The depositary bank has the dual mission of safeguarding the assets of the collective investment scheme and monitoring the lawfulness of certain activities by the fund or its management company. One particularity when it comes to the rights and obligations of depositary banks relates to depositaries of common investment funds (fonds commun de placement – FCP), where the administrative responsibilities of the depositary bank are wider. As such, the depositary bank of an FCP must also engage in day-to-day portfolio administration, verify that the calculation of the net asset value is carried out in compliance with the law and the management policy, as well as monitor that instructions coming from the fund manager are in line with the law and the fund prospectus.
The ambivalence of the Luxembourg depositary’s roles (as an independent watchdog over the management company or a manager of an alternative investment fund’s activity on the one hand, and its service provider for certain delegated tasks, on the other hand) and the corresponding difficulty to strike the right balance between a fiduciary function enshrined in law and business and operational constraints met in practice has always presented a challenge to the industry. The post-crisis regulations, destined to strengthen the monitoring activities of AIF and UCITS’ value chain and to enhance the safety of processes within the industry, have taken this challenge a step further. Overall, the conditions of safekeeping of assets, the due diligence and supervision duties over sub-custodians, if any, and the monitoring of the fund’s operations have significantly increased with these new regulations. Collateral management at the depositary’s level has been overhauled. The breadth of European rules has over the course of the last year deeply reshaped the way in which depositary banks have to fulfil their duties, and go always deeper into their processes and market infrastructure.
The ABBL assists it members in untangling the web of applicable rules and enables members to have an exchange on practices and operations in a neutral environment. The ABBL also serves as a means for members to get involved in the discussions and initiatives regarding the depository, custody and trustee business.