Communication from the Commission to the Council AND to the European Parliament - Regulation of UCITS depositaries in the Member States: review and possible developments
Date: 2004-03-30
Institutions: European Commission
Subjects: financial market, investment company, investment protection, investment transaction, securities

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.03.2004 
COM(2004) 207 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND TO THE EUROPEAN PARLIAMENT  

Regulation of UCITS depositaries in the Member States: review and possible 
developments 

EN 

   EN 

 
 
 
  
1. 

The UCITS depositary plays a specific role in protecting investors: 

With  around  3,500  billion  euros  of  assets  under  management,  UCITS  (Undertakings  for 
Collective  Investment  in  Transferable  Securities)  –  harmonised  investment  funds  –  are  the 
predominant  investment  vehicle  for  the  average  European  household.  They  provide  retail 
investors with the benefits of financial market risk diversification and expertise in investment 
management, at reasonable cost, by pooling investors' savings. 

The  UCITS  depositary  is  entrusted  with  safekeeping  the  assets  of  UCITS  funds  and 
performing a series of controls for the sake of investors. Without the depositary, it could be 
far easier for devious fund managers to cheat investors on the transactions made or even run 
away with the  securities and liquidities owned  by  the  fund,  as  has  happened  in  some  major 
scandals.  Recent  investigations  in  the  US  have  uncovered  some  worrying  malpractice  (e.g. 
allegations of hedge funds making illegal transactions in investment funds at the expense of 
retail investors), which a sound depositary system should contribute to prevent (US laws do 
not make it compulsory for US fund managers to have such a depositary, contrary to the EU). 
So the depositary is a crucial prudential safeguard for UCITS investors. 

2. 

The current regulation of UCITS depositaries at EU level: 

Since the creation of the EU legal framework with Directive 85/611/EEC1, the depositary has 
been one of the three fundamental pillars of that framework, alongside the fund (UCITS) and 
its manager. But it is subject to a very limited number of principles and duties at EU level.  

2.1 

UCITS depositaries are being defined by default and have no European passport 

The depositary is defined in Article 1a of amended Directive 85/611/EEC as "any institution 
entrusted with the duties mentioned in Articles 7 and 14 [prudential missions] and subject to 
the  other  provisions  laid  down  in  Sections  III  a  and  IV  a"  of  the  Directive:  this  reference 
covers  the  rather  general  missions  and  obligations,  which  the  depositary  of  a  unit 
trust/common fund –respectively, of an investment company– has to fulfill. It is important to 
note  that  the  depositary's  legal  nature  is  thus  left  to  Member  States'  discretion.  Moreover,  a 
UCITS  may  be  authorised  only  if  the  competent  authorities  approve  the  choice  of  the 
depositary, whose directors must be of sufficiently good repute and sufficiently experienced 
"also  in  relation  to  the  type  of  UCITS  to  be  managed"  (precision  introduced  by  Directive 
2001/107/EC). 

In terms of resources and supervision, the Directive only requires the depositary to "furnish 
sufficient financial and professional guarantees to be able effectively to pursue its business as 
a  depositary  and  meet  the  commitments  inherent  in  that  function".  No  precision  is  included 
regarding the specific organisation and internal controls of the depositary function. Although 
the depositary is "an institution subject to public control", it need not necessarily be subject to 
genuine  prudential  supervision:  in  particular,  no  reporting  obligation  to  the  competent 
authorities is required. 

The  Directive  also  specifies  that  the  depositary  must  have  its  registered  office,  either  in  the 
same  Member  State  as  the  authorised  fund  manager  (management  company  or  investment 
company), i.e. the Member State where the UCITS is authorised, or in another Member State, 

1 

Council Directive 85/611/EEC of 20 December 1985, on the coordination of laws, regulations and administrative 
provisions relating to undertakings for collective investment in securities (UCITS), OJ L 375, 31.12.1985, p.3.  

2 

 
 
  
 
                                                 
provided it has a branch in the UCITS' Member State – it is then subject to the local UCITS 
competent authorities' approval and "public control". This is restrictive in the modern Internal 
Market. 

2.2 

Depositaries have certain prudential duties, but with vague legal content 

The segregation of assets outside the fund management company, which was inspired by the 
lessons  of the late-60's  IOS scandal, was reflected in  the 1985 Directive by the depositary's 
identification as the entity responsible for safe keeping UCITS assets. Similarly, by including 
a list of key prudential controls (see Annex II), the Directive aimed implicitly to curb other 
risks of conflict of interests on the fund manager's side. 

But the scope of the depositary's liability is not fully specified. The Directive clarifies that it is 
not affected by the fact that depositary has "entrusted to a third party all or some of the assets 
in  its  safe-keeping".  However,  this  does  not  clarify  the  exact  contents  of  the  "safe-keeping" 
concept (see below). More generally, the Directive does not specify whether the performance 
of  any  control  duty  is  subject  to  an  obligation  of  result,  or  rather  to  a  (lesser)  obligation  of 
means. The text of the Directive would seem to support the first interpretation, but this point 
has never been formally confirmed. 

2.3 

There are few precise safeguards against conflicts of interest in depositaries 

The Directive incorporates the principle of separation and ethical independence between the 
fund  manager  and  the  depositary:  both  functions  cannot  be  exercised  by  the  same  company 
and  both  depositary  and  management  company  must  act  "independently  and  solely  in  the 
interest of the unit-holders". But the technical safeguards are very limited. The 1985 Directive 
only  included  two  precise  provisions:  neither  a  fund  manager  nor  a  depositary  acting  on 
behalf of a unit trust could borrow or carry out uncovered sales of transferable securities. 

The  prerequisites  for  the  outsourcing  of  functions  by  delegation  are  another  general  issue. 
During  the  negotiations,  a  general  ban  on  the  delegation  of  functions  by  the  management 
company  to  the  depositary  was  eventually  restricted  to  the  "core  function  of  investment 
management". Nonetheless, the Directive does specify that the delegation of functions "must 
not prevent the management company from acting, or the UCITS from being managed, in the 
best interests of its investors", and does not affect in any way the management company's or 
the depositary's liability and responsibilities towards investors and the competent authorities. 
Regarding the depositary, the Directive does not contain rules on the possible delegation of its 
tasks or functions (except for custody of asset). 

3. 

A fresh policy approach is required at EU level: 

3.1 

The Council has mandated a thorough review of the situation 

In  transposing  the  UCITS  Directives,  Member  States  have  often  included  in  their  own 
regulations  a  broader  list  of  tasks  and  organisational  rules  for  depositaries,  resulting  in 
differing  requirements  across  the  EU.  Therefore,  when  adopting,  on  5  June  2001,  its  joint 
Common Positions regarding future Directives 2001/107/EC2 and 2001/108/EC3, the Council 

2 

3 

Directive  2001/107/EC  of  the  European  Parliament  and  of  the  Council  of  21  January  2002  amending  Directive 
85/611/EEC  [...  ]  with  a  view  to  regulating  management  companies  and  simplified  prospectuses,  OJ  L  41, 
13.02.2002, p.20.  
Directive  2001/108/EC  of  the  European  Parliament  and  of  the  Council  of  21  January  2002  amending  Directive 
85/611/EEC [... ] with regard to investments of UCITS, OJ L 41, 13.02.2002, p.35.  

3 

 
 
  
 
                                                 
also  requested  the  Commission,  in  a  Declaration  accompanying  agreement  on  these 
Directives,  to  submit  a  report  "on  the  regulation  of  depositaries  according  to  Directive 
85/611/EEC and the need for amending the regulation, accompanied, where appropriate, by 
a  proposal  for  a  revision."  In  the  negotiations  on  Directive  2001/107/EC,  the  Council 
Working  Party  envisaged  the  inclusion  of  provisions  specifying  the  depositary's  specific 
functions4.  However,  at  the  end  this  was  ruled  out,  pending  prior  evaluation  of  the  need  to 
further enhance Community harmonisation in this field. 

3.2 

Preparing a medium-term policy position 

Article 2(1) of Directive 2001/108/EC requests the Commission to "forward to the European 
Parliament and the Council a report on the application of Directive 85/611/EEC as amended 
and  proposals  for  amendments,  where  appropriate",  by  mid-February  2005.  It  is  expressly 
foreseen that the report should "…evaluate the organisation of funds, including the delegation 
rules and practices and the relationship between fund manager and depositary". 

This  Communication, which  draws on the outcome  of a public consultation launched in  the 
autumn 20025, concentrates on fulfilling the Council's request on depositaries: 

•  it reviews the regulations in force in the Member States; 

•  it identifies the prudential issues that the current situation raises for the consolidation of the 

Internal Market; 

•  it proposes a way forward to remedy the problems. 

the  concrete 

In  the  medium  term,  some  of  these  issues  will  require  further  in-depth  examination,  in  the 
implementation  of  Directive  2001/107/EC  regulating  UCITS 
light  of 
management  companies,  before  considering  whether  any  corrective  legislative  measures 
might be appropriate.  The outcome of  the work to be launched following the present report 
will therefore be fed into the 2005 overall UCITS report. 

4. 

Key policy issues6: 

4.1 

Depositaries have no full right of establishment 

Opportunities of cross-border branching do not benefit from a "European passport" based on a 
single authorisation in the depositary's Member State of registration: they are subject to case-
by-case approval and control in the UCITS Home Member State. 

4.1.1  The market for depositary services is highly fragmented across the EU: 

Based on data collected by the Commission services (see Annex III- point 4.3), there are two 
major characteristics of the European UCITS depositary market: 

–  National markets, and in particular the larger ones, appear closed to foreign competition. 
Cross-border  branching  cases  are  very  limited:  some  30  cases  were  reported,  against 

4 

5 
6 

Regarding terminology issues on the name "depositary": see Annex I. Regarding the provisions examined in 2000 
by the Council Working Party: see Annex II.  
Almost 100 contributors, with various professional profiles, replied: see Annex III.  
Some detailed considerations reflecting findings of the Commission's consultation are included under Annex III –
point 5. 

4 

 
 
  
 
                                                 
approximately 530 depositaries having their registered office in the UCITS' Home Member 
State (end-2002 figures). However, branch-depositaries may sometimes control significant 
volumes of assets, and further country-specific precisions may be needed to assess market 
penetration by foreign depositaries. 

–  Domestic  competitive  situations  are  not  comparable  across  Member  States:  whilst  on 
average,  each  depositary  (branches  included)  had  in  charge  around  €  6  billion  of  UCITS 
assets  at  the  end  of  2002,  national  average  figures  ranged  from  approximately  1  to  40 
billion  euros.  However  raw  this  indicator  may  seem,  it  nonetheless  illustrates  very 
heterogeneous degrees of market concentration at Member States' level. 

4.1.2  This reflects cross-border legal and prudential obstacles: 

The  limited  number  of  accepted  foreign  institutions  reflects  reluctance  by  Member  States' 
authorities to rely on a foreign legal and prudential system in the case of depositaries, where 
supervisory cooperation is not organised7. This reservation is exacerbated in regard to the free 
provision  of  services8.  Most  of  the  arguments  put  forward  are  also  relevant  in  respect  of 
possible  freedom  of  establishment:  the  partial  disconnection  between  the  supervisory 
authorities  in  charge  of  the  UCITS  and  those  in  charge  of  the  depositary  in  a  context  of 
perceived  insufficient  cooperation,  or  the  diversity  of  legal  obligation  regimes  (accounting; 
tax; property rights on securities, etc.). Fragmentation of the European depositary market also 
acts as yet another obstacle to cross-border fund mergers. 

4.2 

The  typology  of  eligible  depositaries  and  related  prudential  standards  is  not 
harmonised 

One  of  the  first  barriers  to  cross-border  acceptance  of  foreign  depositaries  is  the 
heterogeneous  lists  of  eligible  entities  across  Member  States'  regulations.  Indeed,  the 
depositary's legal nature, and therefore the type of prudential controls a foreign institution is 
actually subject to, have a bearing on the perceived level of investor protection. 

4.2.1  A  stricter  EU  typology  would  contribute  to  better  acceptance  of  cross-border 

depositaries: 

The variety of certain national typologies (see Annex III) should not hide the fact that, overall, 
credit institutions already have a leading share of the market (in eight Member States, they are 
the only permissible depositaries). It would therefore seem appropriate to restrict drastically 
the typology of eligible institutions only to those which are subject to consolidated financial 
supervision,  or  even  to  credit  institutions  –without  prejudice  to  the  possible  inclusion  of 
Central  Banks.  This  would  reflect  the  majority  situation,  facilitate  supervisory  cooperation 
and mutual recognition of prudential standards, and might even contribute to paving the way 
for the acceptance of the free provision of depositary services. It also seems acceptable from a 
political standpoint (see the replies of Member States' authorities under Annex III). 

7 

8 

This  reluctance  may  be  mitigated  by  the  creditworthiness  of  the  depositary's  group:  competent  authorities  may 
expect  the  mother  company  to  settle  any  legal  claims  with  its  "deep  pocket"  in  order  to  prevent  the  depositary's 
reputational risk from jeopardizing the whole group's position. Under this assumption, integrated banking groups 
may constitute a positive development factor for cross-border depositary branching, notwithstanding other crucial 
issues (see below on conflicts of interests), which their organisational model may raise. 
Only a minority of contributors to the Commission's consultation were already favourable to such an innovation: 
inter alia, two national supervisory authorities, three fund manager associations and one banking federation. 

5 

 
 
  
 
                                                 
4.2.2  But the dispersion of capital requirements mirrors further legal barriers: 

The Commission's consultation has evidenced a strong dispersion in capital requirements:  

–  Across all categories of depositaries, the range is between 1 and 900 within the European 

Union (from approximately € 113,000 to € 100 million);  

–  Even within one category –credit institutions– minimum capital requirements vary from € 

5 million to € 100 million. 

Therefore, restricting the number of eligible categories alone would likely fail to boost cross-
border  depositary  services.  To  be  effective,  any  harmonization  of  depositaries'  typology 
would need to go further into detail9, for the following reasons: 

–  Overall,  operating  conditions  for  depositaries  (requirements  on  internal  organisation  and 
resources)  currently  vary  across  the  EU,  even  within  the  same  prudential  category  (e.g. 
credit institutions), as reflected by the dispersion of capital requirements; 

–  Capital requirements also reflect the level of legal risk incurred by the local depositaries. 

Their dispersion across the EU reflects differences in legal obligations; 

–  Depositaries  also  need  minimum  financial  resources  to  cover  investments  (e.g.  computer 
systems)  and  meet  organizational  standards  set  by  national  regulations.  These  standards 
may  vary  in  consideration  of  acceptable  practice  in  a  given  Member  State,  e.g.  which 
depositary  tasks  may  be  outsourced,  and  the  actual  criteria  taken  into  account  by 
supervisors.  Depending  on  where  the  actual  balance  is  set  between  detailed  written  rules 
and case-by-case considerations, the level of e.g. own funds may have more or less critical 
importance. 

4.3 

Cross-border provision of depositary services is hindered by diverging liability 
regimes: 

4.3.1  Legal uncertainty has a cost borne by investors: 

Two major obstacles hinder the assessment of a depositary's liability across the EU: first, the 
diversity of legal regimes, since the 1985 Directive refers to the laws of each Member State; 
second, the sometimes uncertain limits of such liability. In several Member States, although 
the  scope  of  the  depositary's  minimum  responsibilities  is  in  theory  harmonized  by  the 
Directive, their legal nature, their implementation and sanctions are not entirely fixed.  

Depending on the Member State, the depositary may be subject to an obligation of result, or 
an obligation of means, in the performance of its prudential duties. This has a direct impact on 
legal certainty. For example, only three Member State competent authorities seem to exclude 
"force majeure" as an extreme waiver of responsibility. 

Legal uncertainty also results from the commingling of depositary-specific legal obligations 
and the broad civil case law. This is especially the case in jurisdictions, where the principle of 
the  depositary's  liability  according  to  the  Directive  ("unjustifiable  failure  to  perform  …  or 

9 

Some Member States in favour of further tightening of the typology would also support harmonised requirements 
on resources and internal organisation. 

6 

 
 
  
 
                                                 
improper  performance")  is,  explicitly  or  not,  subject  to  limitations  or  derogations.  Retail 
investors actually bear a risk (and costs) which are a priori hidden to them. 

Furthermore,  existing  investor  compensation  schemes  may  not  always  guarantee  that  the 
prejudice  will  be  entirely  covered.  In  certain  legal  systems,  failing  detailed  contractual 
provisions, the sharing of the compensation burden between fund manager and depositary will 
depend on settlements motivated by reputational concerns, –not by legal prescriptions. This is 
sometimes  considered  as  unpredictable.  In  the  absence  of  a  firm  delimitation  of  legal  risk, 
supervisors will rely on the resources of the group, in preference to developing the market for 
external insurance cover, which seems unlikely to capture all legal risk. 

4.3.2  The meaning of 'asset safekeeping' is not harmonized: 

Safekeeping  the  assets  of  a  UCITS  is  the  first  raison  d'être  of  the  depositary.  But  the 
Directive does not specify the content of its responsibility: is it only in charge of prudential 
controls over possible external custodians or is it a full-fledge "keeper" bound by obligations 
towards the manager and the investors, independently from its controls? 

Across  Member  States,  the  mission  of  asset  safekeeping  may,  or  not,  necessarily  involve  a 
custodian  sub-function.  Custody  is  subject  to  drastic  economies  of  scale  and  requires 
considerable  investments  in  computer  systems  distinct  from  those  of  depositary  control.  A 
second  issue  which  differentiates  Member  States  is  whether  or  not  the  depositary  is  really 
subject to an obligation to return the assets, or may limit its liability. 

4.3.3  Clarifying the link between depositary function and (sub-)custodianship:  

In  some  Member  States,  depositaries  may  appoint  a  global  sub-custodian.  Global  (sub-) 
custody business is shared between very few banking behemoths, which compete on trillions 
of  euros  of  assets.  They  also  compete  with  depositaries on  the latter's value-added services. 
These  are  "peripheral"  to  the  depositary's  core  prudential  missions  –  e.g.  collection  of 
dividends, proxy votes – but may help cross-subsidize the costs of prudential oversight.  

A major issue in the clarification of the depositary's safekeeping mission (pure controller or 
compulsory  prime-custodian)  is  its  potential  impact  on  the  quality  of  depositary  controls. 
Should  the  depositary  function  be  identified  with  a  role  of  pure  controller  and  completely 
rescinded  from  the  custodian  function,  the  large  sub-custodians  would  be  in  a  position  to 
capture  an  increasing  fraction  of  custodian  fees,  but  also  added-value  activities.  On  the  one 
hand, compression of custody margins, by concentration of volumes, might benefit investors. 
On  the  other  hand,  this  might  also  result  in  price-led  competition  between  depositaries  on 
their  core  prudential  function,  thereby  jeopardizing,  on  average,  the  quality  of  their  daily 
oversight on fund managers. 

4.4 

Disparate organisational patterns are admitted: 

Although  the  organisation  of  tasks  may  impact,  in  many  cases,  the  depositary's  operational 
risk, the Directive does not include detailed rules on this matter. 

7 

 
 
  
 
4.4.1  The tasks and obligations mostly reflect the missions specified in the Directive10: 

Generally, most Member States consider they have set a precise list of tasks and obligations 
for UCITS depositaries. But this list is considered exhaustive only in certain Member States, 
which may indicate supervisory authorities have some leeway to interpret it.  

4.4.2  But  the  list  of  permissible  activities  is  not  directly  related  to  the  depositary 

function:  

The  activities  connected  with  the  depositary's  function  often  concern  only  a  fraction  of  the 
institution's  business  (the  dominant  model  being  that  of  the  "universal  bank"  or  the 
multifunctional  subsidiary).  Most  Member  States  appear  to  rely  on  the  general  list  of 
permissible activities associated to a given type of institution (e.g. a credit institution). This 
leaves in a grey area those entities which, properly speaking, are not subject to a prudential 
regulation: here is, in practice, some leeway for a case-by-case approval by supervisors. Some 
Member States however prohibits certain activities in order to prevent conflicts of interests.  

4.4.3 

Specific provisions may affect the outsourcing of asset custody:  

There are e.g. limitations on the nature of the sub-custodian or its location, or requirements on 
ex-ante  checks  regarding  foreign  legal  regimes  for  securities  property.  Additionally,  some 
national legislation provide for a certain degree of appraisal by supervisors. 

4.4.4  The  delegation  of  depositary  duties  is  subject  to  differing  supervisory 

approaches:  

Most  Member  State  regulations  do  not  set  a  clear  distinction  between  the  depositary's 
administrative  and  accounting  duties  and  its  prudential  duties.  However,  several  Member 
States  rule  out  the  outsourcing  of  the  depositary's  prudential  duties.  At  the  same  time,  the 
doctrine  restricting  delegation  to  asset  custody  is  a  minority  one.  In  between  these  two 
regulatory  standpoints,  supervisors  appear  to  have  considerable  leeway,  but  supervisory 
approaches differ: e.g. delegation is subject to prior authorisation in five Member States, and 
it  involves  two  categories  of  supervisors  in  at least  nine  Member  States.  Only  one  Member 
State has no particular procedure, e.g. preliminary formalities or monitoring of the delegation.  

4.5 

Conflicts of interest and prudential safeguards: 

There  is  a  striking  divide  in  the  set  up  of  the  depositary  function  in  Europe,  regarding  the 
economic relationship between fund manager and depositary: in two Member States, the latter 
cannot belong to the same group as the manager. Neutralizing conflicts of interest is one of 
the main motivations invoked for this provision. 

Two  types  of  relationships  are  identified,  both  by  Community  legislation  and  by  national 
regulations, as the main sources of conflicts of interest for a depositary: those with the UCITS 
itself and those with the management company. Whilst the Directive emphasizes the principle 
that depositary and management company each have to "act independently and solely in the 
interest of unit-holders", Member States have fleshed out this rule in rather different ways. 

10 

The Directive sets a distinction between the duties of a common fund's depositary (with a longer list) and those of 
an investment company's depositary (see Annex II). However, this asymmetry is not always reflected in national 
regulation:  it  has  been  considered,  in  many  jurisdictions,  that  investment  companies'  shareholders  are  unable  to 
punish the fund manager's misbehaviour and need the same degree of protection as common fund investors. 

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4.5.1  The UCITS - depositary relationship: 

The variety of positions indicates at the same time the diversity of supervisory approaches and 
varying degrees of confidence in the "Chinese walls" expected from a depositary. 

The depositary itself, or an affiliated entity, may often undertake an activity of investment on 
own account or other activities likely to create antagonism between its immediate profits and 
commercial interests, or those of its group, and the interest of the UCITS' investors. Against 
such risk, in at least eight Member States, the general regulatory provisions simply reflect the 
principles of the Directive.  

However, different approaches coexist, regarding permissible transactions and activities. The 
answers to the Commission's consultation have not made it possible to conclude whether all 
Member  States  have  set  up  a  list  of  transactions  with  closely  linked  entities  (affiliated 
transactions) to be subject to particular supervision. Clearly, in some situations, insistence on 
non-supervisory safeguards (e.g. conduct of business rules, disclosure) cannot suffice.  

More  generally,  certain  authorities  defend  the  idea  that  no  internal  procedure  or  "Chinese 
wall"  could  be  able  to  eliminate  completely  the  risks  of  conflict  of  interest:  hence  the 
importance  of  external  inspections  and,  in  cases  of  possible  investor  prejudice,  out-of-court 
redress rules under the monitoring of competent authorities. 

However, existing supervisory inspections may have differing focuses, depending on whether 
they pertain to mainstream supervision of a given category (e.g. credit institutions) or specific 
supervision  of  the  depositary  function.  The  insistence  on  checking  the  latter's  specific 
procedures  and  safeguards  against  conflicts  of  interest  may  therefore  differ.  Moreover, 
focusing  on  detailed  regulation  is  not  always  sufficient  to  comprehend  supervisory 
approaches:  "unwritten  rules"  and  the  possible  preference  for  case-by-case  considerations 
(e.g. of the financial backing of the depositary's group) do matter. 

4.5.2  A striking diversity of relations between depositary and management company: 

Management companies can be independent or, quite often on the continent, integrated within 
a  group  which  may  comprise  other  relevant  entities,  e.g.  brokers,  custodians  and  the 
depositary.  However,  such  group-integration  does  not  follow  a  single  model11.  Only  two 
Member  States  go  as  far  as  prohibiting  common  shareholding  or  common  Board/directors 
membership12.  Conversely,  four  Member  States  do  not  have  any  special  provision  in  this 
field. Member States' regulations leave in some cases significant leeway to supervisors. 

Additional  safeguards  are  included  in  ten  Member  State  regulations,  to  a  varying  extent. 
Flanking supervisory practice also differs. Overall, following rules on legal and capital links, 
prescriptions on the depositary's internal controls and "Chinese walls" are the most frequently 
reported safeguards.  

11 

12 

Several group patterns may coexist in a given Member State: e.g. no group (independent management company); 
cases of traditional "captive customer basis" where a management company has to rely on the group depositary, 
which  raises  issues  of  internal  risk  management  priorities;  or  the  emergence  of  "contestable  markets"  where 
management companies may appoint an external depositary. The depositary function then really becomes a "profit 
centre" and a strategic business line. 
Situations can be even more complex, since nothing prevents the sub-custodian from belonging to the same group 
as the management company. But at least, the depositary function is less exposed to risks of conflicts of interest. 

9 

 
 
  
 
                                                 
Nevertheless,  in  all  the  Member  States,  a  management  company  is  currently  allowed  to 
delegate  a  variable  fraction  of  its  functions  to  an  entity  that  has  close  links  with  the 
depositary,  or  even  belongs  to  its  group.  Certain  competent  authorities  admittedly  wonder 
about the need for harmonised safeguards on such delegation. The Commission's consultation 
identified 13 tasks or activities: an overview of the mosaic of possible delegations (Annex III) 
leads  to  the  conclusion  that,  overall,  a  real  convergence  in  delegations  rules  between  fund 
manager  and  depositary  is  also  a  major  prerequisite  to  the  development  of  cross-border 
depositary services. 

4.6 

Further harmonisation of investor information 

The  vast  majority  of  Member  States  do  not  appear  to  have  developed  more  extensive  rules 
than the Directive's provisions. However, in light of the discrepancies already identified in the 
present  report  (e.g.  on  depositaries'  liability,  organization  of  tasks,  possible  conflicts  of 
interest  etc.),  there  appears  to  be  a  strong  need  for  further  enhancing  the  quality  of  public 
information available to retail investors: contrary to institutional investors, they depend fully 
on third parties' diligence to apprehend the risks involved in investing in a given UCITS. 

4.6.1  The rules on price information do not seem to raise major issues 

UCITS depositaries are required by the Directive and national regulations to ensure that the 
value of units is calculated, and transactions on units are carried out in accordance with the 
law  and  the  fund  rules.  In  general,  investor  information  on  these  rules,  in  particular 
calculation  rules,  does  not  appear  at  this  stage  to  necessitate  additional  harmonisation. 
However, some specific risk-management points may call for further harmonisation, but they 
are  more  of  concern  for  prudential  authorities  than  for  retail  investors13:  for  example,  the 
methodologies  for  evaluating  derivative  positions,  or  illiquid  securities,  and  the  respective 
degrees of involvement of the manager and the depositary in their setting. 

4.6.2 

Increase transparency on the depositary-related costs: 

Retail investors do not choose the depositary, which is responsible towards them under certain 
conditions laid down by national law. Moreover, the costs (fees and commissions) related to 
the  depositary  stem  from  multiple  factors,  sometimes  contingent,  like  the  fund's  investment 
policy  (in  particular  when  the  depositary  effectively  acts  as  a  custodian).  As  a  result,  any 
effort to increase comparability in cost disclosure, either for analysts or retail investors, will 
require: i/ disclosure of the total cost related to the depositary (including the possible hidden 
costs,  e.g.  fee-sharing  agreements,  of  the  relation  between  manager  and  depositary)  and  ii/ 
providing  proper  synoptic  information  on  the  organisation  and  the  effective  liability  of  the 
depositary. 

4.6.3  Enhance investor information on the depositary's organisation: 

The  depositary  may  be  allowed  to  delegate  certain  tasks  to  external  partners  (e.g.  sub-
custodians). Moreover, it may receive delegation mandates from a management company or 
investment company, whilst the responsibility remains entrusted to the latter: retail investors 
should  be  properly  informed,  at  subscription  stage  or  e.g.  for  the  general  meeting  of  an 

13 

Retail investors will be able to obtain, upon request, the detail of the methods for calculation and for monitoring of 
the risks, under the terms of new Article 24a of the Directive. 

10 

 
 
  
 
                                                 
investment company's shareholders14. Moreover, when the fund  manager and  the depositary 
belong to the same group, which is intrinsically, by default, a source of conflicts of interest, 
investor information has, first, to draw their attention to this situation and, second, spell out 
the Chinese walls and other preventive safeguards against conflicts of interest, as well as any 
redress measures foreseen. In no case should disclosure be limited to a generic statement on 
the existence of "Chinese walls" without clarifying what can be expected from such measures. 

4.6.4  Ensure proper investor information on the depositary's liability 

Even  market  practitioners  sometimes  wonder  about  the  imprecise  extent  of  a  depositary's 
liability.  Furthermore,  depending  on  Member  States'  laws,  retail  investors  may,  or  not,  sue 
directly  a  UCITS  depositary,  which  may,  or  may  not  be,  subject  to  an  irrebuttable 
presumption  of  misbehaviour:  e.g.  what  would  a  depositary  owe,  respectively,  to  the  fund 
manager and to retail investors in case of a sub-custodian's winding-up?  

As already pointed out, the consolidation of the Internal Market for depositary services will 
necessitate  convergence  of  the  depositary's  liability  regimes.  This  process  will  take  time, 
without prejudice to the more urgent clarification of some of its components (e.g. the meaning 
of "asset safekeeping"). In the shorter term, nevertheless, enhancing investor information will 
simply give them a better understanding of the real costs they would have to bear, after the 
possible intervention of any available compensation scheme. 

5. 

A comprehensive approach: 

In accordance with the Council's request, this Communication has provided an overall review 
of  applicable  regulations  in  the  Member  States.  Moreover,  this  Communication  has  also 
identified  some  crucial  points  where  real  progress  is  needed:  the  ultimate  objective  is  to 
increase  the  efficiency  of  the  fund  management  industry  in  Europe  by  consolidating  the 
Internal  Market,  thereby  reducing  costs  and  risks,  including  those  currently  hidden  to 
investors,  and  legal  uncertainties  which  hinder  the  emergence  of  cross-border  depositary 
services. 

5.1 

Fields of action 

In the Commission's view, the following areas will require additional harmonisation:  

i/ 

Promote better prevention of conflicts of interests: 

In  light  of  diverging  regulatory  and  supervisory  approaches,  progress  is  needed  on 
convergence  of  the  prudential  frameworks,  regarding  in  particular  a  common  typology  of 
conflicts  of  interests  and  the  necessary  prevention  and  redress  measures.  This  convergence 
should  include  the  list  of  the  functions  that  the  depositary  (or  an  entity  of  its  group)  can 
receive  from  the  fund  manager  by  delegation  and,  conversely,  the  list  of  the  depositary 
activities which may be delegated.  

14 

This report does not deal with corporate governance in investment companies (i.e. UCITS in corporate form); the 
control by their shareholders of a depositary's costs and performance is just one aspect of the question. 

11 

 
 
  
 
                                                 
ii/ 

Clarify the extent of the depositary's liability: 

Promoting clarity and convergence of the depositary's liability regimes across Member States 
will  require  a  common  reading  of  the  concept  of  "asset  safekeeping"  and  of  the  specific 
control duties assigned to the depositary.  

iii/ 

Promote  convergence  of  initial  and  operating  conditions  and,  in  particular, 
capital requirements: 

The typology of eligible depositary institutions should be made to converge by identifying a 
specific group of relevant institutions. This might consist of credit institutions and investment 
firms, subject to additional organisational and resource requirements where appropriate, plus 
relevant public institutions (Central Banks). 

iv/ 

Enhance transparency standards and investor information: 

This should be the highest short-term priority and help put pressure on existing discrepancies. 
Enhanced  public  information  standards  should  cover:  the  organisation  of  the  depositary's 
tasks;  measures  taken  against  conflicts  of  interest;  the  depositary's  liability;  all  the  costs 
connected to the depositary's services.  

5.2 

A step-by-step approach 

Work  should  begin  with  EU  regulatory  experts  to  develop:  first,  standards  on  investor 
information and conflicts of interest; second, standards on the depositary's missions, resources 
and liability. 

The Commission will take stock of the results of this work, especially by assessing the need 
for possible legislative measures to achieve necessary harmonisation where appropriate. The 
Commission's conclusions will be fed into two reports: 

–  A  chapter  on  depositary  issues  will  be  attached  to  the  2005  overall  UCITS  Report 
requested from the Commission under Article 2 of Directive 2001/108/EC. This sub-report 
will address two questions: 

•  Whether and how the relationship between fund manager and depositary may be 
better  regulated  by  EU  legislation,  especially  insofar  as  preventing  conflicts  of 
interest is concerned; 

•  Whether  and  how 

institutions,  and 
consequently  their  missions  and  resource  requirements,  might  be  needed  to  be 
harmonised by EU legislation.  

typology  of  eligible  depositary 

the 

–  A subsequent report will review progress on the above-listed points and on the use of the 
existing branching possibility for cross-border provision of depositary services. This report 
will evaluate whether there is a need for expanding, through EU legislation, cross-border 
opportunities for a full European passport for EU depositaries (branching under sole Home 
MS responsibility and free provision of services). 

12 

 
 
  
 
 
5.3 

Timetable: 

Output: 

Time: 

EU  regulatory  experts  (liaising 
with the Commission) 

Standards  on  investor  information 
and conflicts of interest 

By early 2005 

EU  regulatory  experts  (liaising 
with the Commission) 

Standards  on 
missions, resources and liability 

the  depositary's 

By mid-2005 

Commission 

Chapter  on  UCITS  in  2005  overall 
UCITS  report 
the  European 
to 
Parliament and the Council 

By mid-2005 

Commission 

Conclusive depositary report  

By early 2006 

13 

 
 
  
 
 
 
ANNEX I  

Glossary:  

UCITS  (legal  form):  depending  on  the  jurisdiction,  UCITS  can  be  constituted  either  under 
the law of contract (as common funds), or trust law (as trusts), and (also) under statute, i.e. in 
corporate  form  (as  investment  companies).  The  Directive  may  refer  to  both  non-corporate 
forms under one designation, e.g. "common fund" or "unit trust". Importantly, some Member 
States' legal frameworks are limited to common funds, i.e. all their UCITS are without legal 
personality and depend on a designated external fund manager (a management company). 

UCITS'  fund  manager:  either  a  management  company  or  a  "self-managed  investment 
company". Unlike common funds or unit trusts, corporate UCITS, i.e. investment companies, 
may bring together a vehicle (the fund) and a fund management capacity into the same entity. 
In  that  case,  Directive  2001/107/EC  has  clarified  that  they  should  be  referred  to  as 
"investment  companies  which  have  not  designated  a  management  company"  in  their 
instruments  of 
this 
i.e.,  self-managed 
Communication,  most  of  the  remarks  concerning  the  "fund  manager"  or  "management 
company" should also be deemed to apply to self-managed investment companies, except that 
these may not receive any task under a delegation mandate, e.g. from the depositary. 

investment  companies. 

incorporation  – 

In 

UCITS depositary: it is simply defined by the Directive as an entity entrusted with specific 
prudential missions and subject to a number of other general provisions (see under point 2.2 
above and Annex II). The UK regulatory designation is twofold, according to whether these 
missions have to be achieved with regard to unit trusts (by a "trustee") or with regard to an 
investment  company  (by  a  "depository").  However,  for  the  reader's  convenience,  only  the 
term "depositary" has been used in this Communication. 

It  should  also  be  noted  that  the  specific  regulatory  meaning  of  the  designation  "UCITS 
depositary"  is  precisely  based  on  the  peculiar  nature  of  these  missions  and  obligations  and, 
more  generally,  of  the  provisions  drawn  up  under  UCITS  national  regulation  from 
Community  law15.  The  scope  of  the  concept  of  "safekeeping"  of  assets,  to  which  it  is 
particularly related, has thus to be considered in this specific context (see under point 4.3.2). 

Central  Securities  Depositary  (CSD)*:  an  entity  entrusted  with  the  safekeeping  and 
administration  of  securities,  which  enables  securities  transactions  to  be  processed  by  book-
entry, and may moreover have clearing and settlement functions. Among the findings of the 
Commission's Consultation is also the fact that in certain Member States, CSDs are explicitly 
listed  in  the  typology  of  sub-custodians  to  which  a  UCITS  depositary  may  entrust,  under 
certain conditions, all or part of the assets under its safekeeping. 

Custodian*:  an  entity  entrusted  with  the  safekeeping  and  administration  of  securities  and 
other  financial  assets  on  behalf  of  others,  and  may  moreover  provide  additional  services, 
including clearing and settlement, cash management, foreign exchange and securities lending. 

15 

An  institution  which  acts  as  UCITS  depositary  may  also  carry  out  parallel  activities  on  account  of 
collective  investment  undertakings,  which  are  not  covered  by  the  UCITS  Directive  ("non-UCITS"); 
there  are  moreover  some  'depositaries'  which  are  specialised  in  non-UCITS,  and  are  not  necessarily 
subject to the same prudential rules and duties. 

14 

 
 
  
 
                                                 
An  entity  which  is  entrusted  by  a  custodian  with  a  fraction  of  the  assets  under  its  nominal 
custody is a sub-custodian. 

Global sub-custodian*: a sub-custodian which provides its client, here the UCITS depositary 
(legal keeper of the assets), with custody services in respect of securities traded and settled on 
markets of various  countries, through its own  network. The global sub-custodian is a single 
interlocutor providing a range of services which may well overlap with those that the UCITS 
depositary  may  itself  provide  to  the  UCITS  fund  manager  beyond  its  core  missions  of 
prudential control. 

(*) For more details, see: 

- the European Central Bank's Blue Book on "Payments and Securities Settlement Systems in 
the European Union" (June 2001), incl. the glossary; 

- the Second Report of the Giovannini Group on Clearing and Settlement Arrangements in the 
European Union, April 2003. 

15 

 
 
  
 
ANNEX II  

The depositary's missions and liability: 

1. 

The depositary's missions according to the 1985 directive:  

1.1. 

Safekeeping the assets of the UCITS: 

Article  7(1)-(2)  for  the  common  fund's  depositary  (respectively,  Article  14(1)-(2)  for  the 
investment company's depositary) read:  

1. A unit trust's assets [respectively, An investment company's assets] must be entrusted to a 
depositary for safe-keeping.  

2. A depositary's liability as referred to in Article 9 [respectively, in Article 16] shall not be 
affected by the fact that it has entrusted to a third party all or some of the assets in its safe-
keeping. 

1.2.  The other missions: 

They are listed under Article 7(3) for the common fund's/unit trust's depositary (respectively, 
under Article 14(3) for the investment company's depositary):  

Article 7(3) (common fund / unit trust): 

A depositary must, moreover: 

(a) 

(b) 

(c) 

(d) 

(e) 

ensure that the sale, issue, re-purchase, redemption and cancellation of units effected 
on behalf of a unit trust or by a management company are carried out in accordance 
with the law and the fund rules; 

ensure that the value of units is calculated in accordance with the law and the fund 
rules; 

carry out the instructions of the management company, unless they conflict with the 
law or the fund rules; 

ensure  that  in  transactions  involving  a  unit  trust's  assets  any  consideration  is 
remitted to it within the usual time limits; 

ensure that a unit trust's income is applied in accordance with the law and the fund 
rules. 

Article 14(3) (investment company): 

Obligations spelled out in the first, fourth and fifth points above (letters "a", "d" and "e"). 

2. 

The depositary's liability in the 1985 directive: 

It is covered by Article 9 for the common fund's depositary (respectively, Article 16 for the 
investment company's depositary). 

16 

 
 
  
 
Article 9 (Common funds):  

A depositary shall, in accordance with the national law of the State in which the management 
company's  registered  office  is  situated,  be  liable  to  the  management  company  and  the  unit-
holders  for  any  loss  suffered  by  them  as  a  result  of  its  unjustifiable  failure  to  perform  its 
obligations  or  its  improper  performance  of  them.  Liability  to  unit-holders  may  be  invoked 
either directly or indirectly through the management company, depending on the legal nature 
of the relationship between the depositary, the management company and the unit-holders.  

Article 16 (Investment companies):  

A depositary shall, in accordance with the national law of the State in which the investment 
company's  registered  office  is  situated,  be  liable  to  the  investment  company  and  the  unit-
holders  for  any  loss  suffered  by  them  as  a  result  of  its  unjustifiable  failure  to  perform  its 
obligations, or its improper performance of them.  

3. 

Provisions examined by the Council Working Party:  

Proposed in the autumn 2000, the addition of such provisions was ruled out pending further 
evaluation of the need to further harmonisation in this field.  

SECTION IIIa 

Obligations regarding the depositary 

Articles 7 and 8 shall be modified as follow.  

1.-at  the  end  of  article  7  paragraph  2:  "the  Depositary  shall  not  delegate  its  functions  of 
control of the UCITS" and  

-at  the  end  of  this  article:  "The  description  of  the  functions  of  the  depositary  is  detailed  in 
Annex III."  

2. The following sentence shall be added at the end of Paragraph 2 of article 8:  

"It must communicate to the UCITS competent authority a programme of activity setting out, 
inter  alia,  its  organisational  structure  and  its  procedures.  The  depositary  must  have  sound 
administrative  and  accounting  procedures,  control  and  safeguard  arrangements  for 
electronic data processing and adequate internal control mechanisms. It must communicate 
to the UCITS competent authority any information required to monitor compliance with the 
above conditions on a continuous basis.  

Proposed Annex III:  

Bookkeeping of Custody accounts:  

–  accounting for cash accounts and securities accounts in the name of the UCITS;  

–  safekeeping  of  assets  and  their  transfer  on  demand  of  the  UCITS,  according  to  the 

measures laid down by the market authorities;  

–  settlement of instructions from the management company; 

–  clearing of derivatives instruments traded on regulated markets;  

17 

 
 
  
 
–  payment of dividends and income on assets held in the name of the UCITS;  

–  processing corporate actions on these assets;  

–  tax treatment linked to the UCITS;  

–  centralising purchases and redemptions when the UCITS is not listed on a market.  

Compliance:  

The Depositary shall check the compliance with, and ensure the respect of the management 
company of, the:  

–  prudential investment rules;  

–  investment policy set out in the information sheet or the prospectus;  

–  regulatory framework applying to UCITS;  

–  rules for calculating the value of UCITS units;  

Furthermore, the Depositary ensures control of respect of the legal formalities of the UCITS.  

18 

 
 
  
 
ANNEX III  

Main  lessons  of  the  consultation  carried  out  by  Commission  services  on  the  regulation  of 
UCITS depositaries in the Member States:  

1. 

Background:  

The  consultation  16  was  launched  on  5  September  2002,  and  was  closed  on  19  November  after 
receipt  of  the  very  last  answers  from  some  Member  State  supervisory  authorities.  Overall,  the 
Commission services received 97 answers. 

Not  all  respondents  answered  the  full  set  of  questions:  in  general,  more  than  80  contributions 
were made on each of the Sections A to F (regulatory issues), but in several cases contributors 
only  provided  few  answers  per  Section.  Moreover,  in  a  number  of  cases,  very  similar,  if  not 
identical responses were made by several institutions. Under these conditions, it is important to 
consider  with  precaution  the  data  resulting  from  the  aggregation  of  all  the  answers  collected 
through the consultation. 

Against  this  background,  the  presentation  which  follows,  after  introducing  a  typology  of 
contributors, will illustrate some of the main lessons of the consultation from a regulatory point 
of view (based the answers provided by the competent authorities of the 15 Member States).  

2. 

The contributors' professional typology:  

The consultation made it possible in particular to collect, inter alia, the views of the competent 
authorities in the 15 Member States. 

A  second  substantial  category  of  contributors  comprises  those  professional  bodies,  which  felt 
concerned with the consultation at Member State-level: 

- ten national fund managers associations; 

- one savings bank associations; 

- five national banking federations; 

- two national depositary association; 

- two specific contributions from a national Chamber of commerce and an association of finance 
companies. 

Some  60  remaining  answers  were  made  by  "market  practitioners"  (even  though  not  all  such 
contributors labeled themselves as such): 

–  close  to  40  replies  concerning  the  depositary  activity  as  such  (official  replies  on  behalf  of 

depositary institutions and additional replies by bank managers); 

–  9 replies by fund managers; 

16 

The text (in Word format) is available at the following address: 
http://europa.eu.int/comm/internal_market/en/finances/mobil/ucits/2002-consult/index_en.htm  

19 

 
 
  
 
                                                 
–  3  replies  clearly  identified  as  contributing  the  viewpoint  of  a  credit  institution  exclusively 

outside the depositary business; 

–  one reply by a law firm; 

–  one reply by an audit company; 

–  additionally, a half-dozen replies coming from credit institutions combining various profiles. 

At  European  level,  off-line  contributions  were  made  on  behalf  of  the  European  fund  managers 
association (FEFSI) and a cross-national retail investors' association. 

It is also worth noting, first, that no natural person involved in depositary activities replied to the 
consultation (although it appears this is legally possible in at least one Member State, based on 
contributions by supervisory authorities)17. Second, no retail investor contributed as such to the 
consultation. 

All in all, a majority of responses were contributed by practitioners who are involved in various 
respects  in  depositary  matters  and  hence  may  have  varying  degrees  of  knowledge  of  the  legal 
issues raised in the questionnaire; this may help understand why ten contributors had reservations 
(“expectations not met”) on the questionnaire; eight of them clarified their grounds:  

- not relevant ("irrelevant in content"): 4 answers;  

- too complicated ("too difficult to understand"): 2 answers;  

- too long: 1 answer;  

- too much technical: 1 answer.  

Approximately 90% of on-line contributors were satisfied with the content of the consultation.  

3. 

Geographic breakdown of the contributions:  

Four Member States account for approximately 61% of the contributions.  

LU 

FR 

EL  UK   AT  BE  DE  ES 

IE  

IT 

SE 

PT  DK   FI   NL  Others  

26  

14  

9  

9  

5  

5  

4  

4  

4  

4  

4  

2  

1  

1  

1  

4  

26.8%  

14.4%   9.3%  

9.3%  

5.2%  

5.2%  

4.1%  

4.1%  

4.1%  

4.1%  

4.1%  

2.1%  

1.0%  

1.0%  

1.0%  

4.1%  

17 

Some  contributors  (bank  managers)  did  mention  “natural  person”  as  their  field  of  activity  (due  to  a 
misunderstanding on the meaning of the question concerned, which was not referring to a particular status 
of the natural person responsible for the depositary business within the depositary institution). Due to this 
and other slightly erratic answers, data had to be reprocessed for statistical treatment of aggregated answers. 

20 

 
 
  
 
                                                 
Some  of  the  main  lessons  drawn  from  the  contributions  made  by  Member  States' 

4. 
authorities: 

4.1.  Concentration varies –and cases of branch-depositaries remain limited: 

Cases  where  the 
depositary has  his 
registered  office 
the  Member 
in 
the 
State  where 
UCITS 
was 
authorised 

the 
Cases  where 
depositary only has a 
branch 
that 
in 
Member State  

Overall  assets  of 
UCITS  authorised 
that  Member 
in 
in  billion 
State, 
euros * 

p.m:  Overall  assets 
of  investment  funds 
(UCITS  and  non-
UCITS) authorised in 
that Member State, in 
billion euros * 

BE 

DK  

DE 

EL  

ES 

FR  

IE  

IT  

LU  

NL  

AT 

PT  

FI  

SE  

UK  

13 

15 

+/- 80 

15 

118 

87 

23 

48 

65 

0** 

22 

17 

12 

< 10 

7 

TOTAL  

+/- 530 

2 

2 

2 

none 

5 

none 

5 

2 

6 

none 
1 

1 

2 

1 

none 

+/- 30 

71.5 

38.3 

199.5 

25.4 

170.8 

805.9 

238.5 

360.7 

766.5 

10.0*** 

63.8 

19.0 

15.7 

55.3 

275.5 

3,116.4 

77.2 

38.3 

751.0 

27.1 

172.9 

889.3 

303.9 

371.0 

844.5 

106.3 

85.3 

24.5 

17.7 

56.1 

370.2 

4,133 

* FEFSI data covering the situation at the end of Dec. 2002 (except NL: at the end of Dec. 2001). 
The data (UCITS + non-UCITS) are provided as a mere illustration of the relative importance of 
UCITS'  assets  at  national  level.  It  is  important  to  note  that  the  end-2002  figures  reflect,  in 
particular,  the  impact  of  the  bear  market  for  stocks,  depending  on  the  importance  of  UCITS' 
investments in equities (which varies significantly across Member States). 

** The UCITS authorised in The Netherlands are all listed investment companies, which are not 
subject to the requirement to have a depositary: this is an option left to Member States' discretion 
by  Article  14(5)  of  Directive  85/611/EEC,  --subject  to  some  limitations  on  grounds  of  investor 
protection. 

*** End-2002 estimate (source: Dutch FMA) 

21 

 
 
  
 
 
DE 

EL  

ES 

IT 

LU 

NL  

AT 

PT 

FI  

SE 

UK 

4.2.  Current typology of eligible institutions and preferred possible future typology:  

Regulators’ 
typology:  

preferred 

target 

Current regulation (with an indication of specific 
minimum capital requirements, where relevant):  

BE 

Credit institutions and investment firms, 
both subject to additional organizational 
and capital requirements; Central Bank  

DK  

Credit institutions only 

Credit institutions only 

Credit  institutions,  investment  firms,  public  institutions 
(e.g. Central Bank) 

Credit institutions 

Credit institutions 

Supervised institutions in general 

Credit institutions 

subject 

prudential 
Institutions 
supervision  by  the  central  Bank  or  the 
Financial Markets Authority  

to 

FR 

Supervised institutions in general 

IE  

Supervised institutions in general 

____  

____  

No  restriction  to  specific  categories 
(insofar  as  the  activities  of  securities 
administration  on 
safekeeping 
account  of  third-parties  are  subject  to 
supervision)  

and 

Credit institutions, investment firms 

institutions, 

insurance 
Credit 
undertakings, public institutions (e.g. Central Bank); min 
capital requirement: 3.8 million euros 

investment 

firms, 

Certain credit institutions (min. cap. 6.35 million euros) 
+  wholly-owned  subsidiaries  of  credit  institutions  (incl. 
those of equivalent institutions in third countries) subject 
to  "financial  resource  requirements"  of  at  least  125,000 
euros (or one year's fixed overheads), incl. by means of a 
subordinated loan assessed by supervisory authorities  

Credit institutions (min. cap. 100 million euros)  

Credit institutions (min. cap. 8.7 million euros, including 
6.2 million euros of paid-up share capital)  

institutions  +  other  categories 

Credit 
(securities 
administration  firms,  certain  trusts,  independent  firms); 
min. cap. 113,445 euros  

Credit institutions only 

Credit institutions 

Credit institutions only 

Credit institutions (min. cap. 7.5 million euros)  

Supervised institutions in general 

Credit  institutions,  investment  firms,  other  regulated 
legal persons  

Credit institutions only 

Credit institutions  

Supervised institutions in general 

institutions, 

Credit 
insurance 
undertakings,  other  regulated  legal  persons;  min.  cap. 
£ 4 million. 

investment 

firms, 

22 

 
 
  
 
 
4.3.  On the basis of a list of 13 functions identified in the consultation, possible delegations by the management company to the depositary:  

Shaded box: functions identified as eligible for possible delegation to the depositary in a given Member state 

Customer 
enquiries 

Regulatory 
compliance 
monitoring 

Mainte-
nance  of 
unit-
holder 
register 

Distribu-
tion of 
income 

Record 
keeping 

Contract 
settlement 
(incl. 
certificate 
dispatch 

Invest-
ment 
mana-
gement 

Internal 
control 
Funct-
ions  

Risk-
manage-
ment 
proce-
dures 

Precondi-
tions / 
other 
functions 

Depositary  

Valuation 
and 
(incl. 
returns) 

pricing 
tax 

Legal  and 
fund 
manag.mt 
accoun-
ting 
services 

(ascribable 
to 
the  depositary 
contract, 
by 
a 
by 
not 
delegation)  

shared  

shared  

Depositary 

Depositary  

marketing  

issue 

Unit 
and 
redemption 

DK    
DE  Depositary 

EL 
ES 

shared  

shared  

FR 
IE  
IT  Depositary 
LU 
NL 
AT 
PT 
FI  
SE  

NB: BE and UK did not supply any detailed answer to this question. 

"Depositary": function considered as being immediately under the depositary's responsibility; "shared": function for which the responsibility is shared between the trust company and the depositary, 
depending on the precise tasks that it covers. 

Furthermore, pursuant to Directive 2001/107/EC, Member States may also allow UCITS management companies to provide the following "non-core service": safekeeping and administration in relation 
to units of collective investment undertakings – which could modify the allocation of tasks between depositary and management companies in some jurisdictions 

23 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Some  further  comments  related  to  differences  in  the  depositary's  legal 

5. 
frameworks: 

5.1 

Prudential issues related to the interpretation of 'asset safekeeping' 

5.1.1  Limitations to the depositary's liability: 

The issue is whether or not the depositary is really subject to an obligation to return the assets 
in any events (except limited cases of "Acts of God" or really exceptional circumstances left 
to  the  court's  appraisal).  When  other  legal  or  contractual  limitations  are  accepted,  the 
depositary tends to assume a role of sub-custodians' controller, i.e. it may be able to waive its 
liability even in the event of bankruptcy or fraud of a sub-custodian provided it can prove it 
exerted controls with "reasonable diligence".  

5.1.2  Prudential concerns on the link between depositary, sub-custodian and UCITS: 

Even as a prime custodian, the depositary may entrust assets to sub-custodians, or even to a 
single  global  sub-custodian,  whose  network  will  handle  for  it  the  relationships  with  each 
country-specific  central  depositary  (CSD).  The  depositary  will  then  concentrate  its 
counterparty  risk  on  one  partner  institution:  this  possibility  is  admitted  in  at  least  nine 
Member States. Another type of relation, admitted in at least three Member States, consists in 
the  direct  opening  of  an  account  by  the  UCITS  with  a  sub-custodian.  This  situation  raises 
specific prudential issues in terms of effectiveness of depositary oversight. 

5.2 

Impact of the distinction between obligation of means and obligation of result: 

Depending on the Member State, the depositary may be subject to an obligation of result, or 
an obligation of means, in the  performance  of  its prudential duties.  For  instance,  to  "ensure 
that  the  value  of  units  is  calculated  in  accordance  with  the  law  and  the  fund  rules"  may 
translate  into  two  dramatically  different  levels  of  responsibility  and  computer-technology 
investments:  the  depositary  may  either  have  to  control  the  calculation  methods  (through 
sample-checks  and  credibility  tests  based  on  indices)  or  be  subject  to  a  duty  to  achieve  the 
same result (with a systematic recalculation of positions).  

Some  examples  of  sources  of  conflicts  of  interest  and  existing  regulatory 

5.3 
safeguards: 

5.3.1  Cash deposits: 

Cash  deposits  by  a  UCITS  with  its  depositary  are  common  market  practice.  One  UCITS 
competent  authority  reportedly  uncovered,  through  on-site  inspection  of  the  depositary,  the 
existence of unfair contracts, where the UCITS was remunerated below market conditions. 

5.3.2  Sharing of registered office between depositary and management company: 

Only  a  minority  of  Member  States  seem  to  have  included  in  their  regulations  a  ban  on  the 
depositary and the management company sharing the same registered office: prevention of a 
major  conflict  of  interest  would  then  rest  on  the  requirements  and  "unwritten"  prohibitions 
directly imposed by supervisors.  

24 

 
 
  
 
5.3.3  Some further comments on the matrix of delegation possibilities provided under 
point 4.3 of this Annex: 

Based  on  the  replies  of  competent  authorities,  it  seems  that  in  at  least  one  Member  State,  a 
management company could delegate all its tasks, except for internal controls (but including 
risk-management  procedures);  in  four  other  Member  States,  it  may  delegate  7  to  10  of  the 
functions concerned. Except for risk-management, all other tasks were mentioned by at least 
two  regulators  as  eligible  for  such  delegation  (including  internal  controls  and  investment 
management)18.  

18 

Furthermore,  the  lead  responsibility  for  a  given  task  may  sometimes  be  allotted  alternatively,  depending  on  the 
Member State, to the management company or the depositary (but with the further possibility of delegation to the 
other, depending on regulatory and contractual provisions).  

25