A Better Grasp of Non-financial Risks

The European Fund Management Industry Needs a Better Grasp of Non-financial Risks — December 2010

Appendices

explanation of the fund's risk profile” (EC 2008).

that, as a result of their nature, cannot be held in custody, a task that is not defined in EU regulations (UCITS III and UCITS IV) but is in some country regulations. Bookkeeping includes receiving all payments from the securities, booking the securities in a separate account, and confirming that these securities belong to the fund. The securities and funds involved are registered shares, investments in private equity, counterparties to derivatives, and registrars of hedge funds. Bookkeeping prevents massive fraud by the investment manager. It does not prevent the disappearance of assets held by third parties. Checks Some checks (compliance checks, auditing checks) are defined fairly clearly in the UCITS directive, even if the ways they are meant to be done are unclear (or impossible). Other checks, such as those done by the board, are left undefined. As a result, the obligations of the board vary from one country to another. The depositary is responsible for ensuring that the decisions made by the UCITS (or by the investment firm) comply with regulation. It must ensure that the UCITS complies with the investment rules laid out in the prospectus and regulatory ratios imposed on it. It must likewise ensure that the UCITS is correctly classified. The depositary checks compliance with rules on the minimum net asset value of the UCITS. The UCITS directives requires that depositaries of contractual funds ensure that rules for pricing the assets and establishing the net asset value are Regulatory compliance monitoring by depositaries

From custody to bookkeeping Custody

The depositary is in charge of custody of the assets of the UCITS, 46 a function that includes the so-called post-market functions of the investments made by the UCITS. The depositary ensures the settlement and delivery of transactions, paying for the securities on reception in the event of a purchase and delivering them on reception of cash in the event of a sale, all in liaison with the central depositary for local transactions or with its corresponding sub-custodians for international transactions. It processes securities transactions and informs the UCITS of them. Finally, it keeps certificates when the securities are not dematerialised. It records in the cash and securities accounts the transactions realised by the UCITS. In France, depositary control and custody are historically the role of a single entity, whereas in European common- law countries they are more often separate. The depositary, like most other service providers, is usually hired by the investment firm (the custodian enters a contractual agreement with the board in the United States, but is usually chosen by the investment firm). Custody is sometimes entrusted (to foreign sub-custodians or prime brokers), and the depositary must then make sure that its correspondent is sound and that assets are separated.

46 - UCITS III, article 7: “A trusts's assets must be entrusted to a depositary for safe-keeping”. Article 14: “An investment company's assets must be entrusted to a depositary for safe-keeping” (EC 2008).

Bookkeeping The depositary enters into its books assets

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An EDHEC-Risk Institute Publication