AIFMD II 101: Part 4 – Impact on depositary and third country rules

• This fourth instalment of our AIFMD II 101 series focuses on changes to the provision of custody and depositary services and third country rules introduced under AIFMD II.
  
  
• AIFMD II provides for the cross-border provision of AIF depositary services under strict conditions, as well as providing important clarifications around the treatment of CSDs in the custody chain.
  
  
• We also outline the changes AIFMD II will make to the criteria and requirements governing third-country entities' market access to the EU under national private placement regimes.

On 15 April 2024, Directive 2024/927/EU amending AIFMD (2011/61/EU) ("AIFMD") and the UCITS Directive (2009/65/EC) as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds ("AIFMD II") entered into force. The entry into force of AIFMD II marks a significant milestone for the European asset management industry. 

Our AIFMD II 101 advisory series considers a number of key changes for the asset management industry introduced by AIFMD II. The first part of our advisory series focused on the key changes for managers pursuing loan origination strategies, in light of the new harmonised framework for loan originating activities across the European Union ("EU"). The second part of our series focused on the new legal framework under AIFMD II in relation to the use of liquidity management tools. The third part focused on the new legal framework under AIFMD II in relation to delegation, authorisation and reporting.

In this fourth part of our advisory series, we examine the key changes introduced under AIFMD II in respect of depositary and third country rules. 

Please also refer to our other AIFMD II publications "AIFMD II – A closer look" and "AIFMD II: Timeline to Implementation".

Depositary rules 

Appointment of a depositary from an EU country which is not the home EU member state ("Member State") of the AIF

AIFMD II introduces the ability for individual Member States to permit the provision of depositary services to alternative investment funds ("AIFs") on a cross-border basis, whereby a depositary established in a Member State, other than in the home Member State of the AIF, may be appointed to the AIF. Although a welcome change, the rules constitute a derogation from existing rules and accordingly do not provide the EU-wide depositary passport which was advocated for by many stakeholders. These provisions of AIFMD II are subject to national implementation and to prior approval by the AIF's national competent authorities ("NCA") on a case-by-case basis as well as upon satisfying a number of conditions. These conditions include that: 

• the alternative investment fund manager (the "AIFM") demonstrates to the NCA the lack of relevant depositary services in the home Member State of the AIF that are able to effectively meet the needs of the AIF having regard to its investment strategy; 
  
  
• the aggregate amount of assets entrusted for safe-keeping by depositaries in the AIF's home Member State does not exceed EUR50 billion or the equivalent in any other currency; and
  
  
• notwithstanding the conditions in a) and b) being met, the NCA shall only permit the appointment after carrying out a case-by-case assessment of the lack of relevant depositary services in the home Member State of the AIF having regard to the investment strategy of the AIF.

In this regard on 22 November 2024, the Department of Finance launched a public consultation on the exercise of the national discretions in AIFMD II which will assess the implementation of these provisions, among others, in Ireland's transposition of AIFMD II.

Where the NCA permits the appointment to an AIF of a depositary established in another Member State, it must notify ESMA. AIFMD II also provides for the ability of NCAs in the home Member State of the AIF and the AIFM to request information obtained in connection with the performance of the depositary's cross-border duties.

Measures to permit the cross-border appointment of depositaries are not introduced for UCITS.

By 16 April 2029, the European Commission (the "Commission") is required to carry out an assessment of the functioning of the derogation allowing the appointment of a depositary established in another Member State and of the potential benefits and risks, including the impact on investor protection, on financial stability, on supervisory efficiency and on the availability of market choices, of amending the scope of that derogation, in line with the objectives of the capital markets union.

Central securities depositories ("CSDs")

AIFMD II incorporates CSDs providing AIF and UCITS custody services into the respective custody chains in the interests of investor protection and to ensure a stable information flow between the custodian and the depositary. To avoid unnecessary work, the requirement on depositaries to perform ex ante due diligence is disapplied where they intend to delegate custody to CSDs.

On foot of ESMA recommendations¹, AIFMD II clarifies that the provision of services by a CSD acting in the capacity of an issuer CSD² (as distinct from investor CSD) will not be considered a delegation of a depositary's custody functions.

Third country requirements

Impact of AIFMD II on the third country marketing obligations 

AIFMD II amends the criteria governing non-EU AIFMs marketing AIFs and non-EU AIFs marketing in the EU without a passport under national private placement regimes ("NPPRs"). 

EU market access for such third country entities is restricted to a third country that qualifies as follows:

• it is not identified as a high-risk third country pursuant to the EU’s Anti-Money Laundering Directive (EU) 2015/849 (known as the 'Article 9 blacklist'), in replacement of the previous FATF list of 'Non-Cooperative Countries and Territories'; and
  
  
• it has signed an agreement with the Member State in which the shares of the non-EU AIF are intended to be marketed which fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters in line with international standards; and 
  
  
• it is not mentioned on the revised EU list of non-cooperative jurisdictions for tax purposes (the 'Annex I blacklist') (subject to certain grace periods).

Non-EU entities accessing the NPPR will need to observe revisions made under AIFMD II to the pre-investment disclosure to investors requirements (Article 23) as well as enhancements to the reporting required to NCAs of market and instrument-related data (Article 24), as further outlined in the third part of our series.

Notably ESMA is empowered under AIFMD II in the interest of investors and in exceptional circumstances to require that non-EU AIFMs marketing under the NPPR as well as EU AIFMs managing a non-EU AIF would activate (or deactivate) the liquidity management tool referred to in Annex V, point 1, (namely, the suspension of subscriptions, repurchases and redemptions). ESMA is enabled to make such an intervention where there are risks to investor protection or financial stability which, on a reasonable and balanced view, necessitate such activation or deactivation (see also the second part of our advisory series). 

Concluding remarks 

As outlined above, AIFMD II entered into force on 15 April 2024 and will need to be transposed by Member States into their national law by 16 April 2026, at the latest. 

Third country entities seeking access to EU markets under the AIFMD regime should monitor local transposition of AIFMD II into domestic regimes, in particular to ensure preparedness for the enhanced disclosure and reporting obligations, including familiarising themselves with the new ESMA reporting templates. Guidelines published pursuant to AIFMD II pre-investment disclosure requirements³ including ESMA's naming guidelines for funds using ESG or sustainability-related terms, should not be overlooked by in-scope NPPR-registered AIFs. AIFMs and AIFs established in third countries will need to monitor the Article 9 and Annex I blacklists to ensure their home jurisdictions continue to qualify for EU market access pursuant to AIFMD II requirements.

The amendments to the depositary appointment rules fall short of an EU-wide AIF depositary passport and it remains to be seen to what extent the new cross-border market for depositaries will be implemented by Member States and utilised in practice given the restrictive qualifying conditions to be applied. Nevertheless, the ability to provide cross-border services can only serve to increase competition in the depositary market and lessen market concentration and may serve as a pre-cursor to a fully-fledged depositary passport for AIFs emerging in the future as part of the Commission's review of the functioning of the derogation.

 1 ESMA's opinion on asset segregation and applying depositary delegation rules to CSDs.

 2 A CSD which provided a core service referred to in point 1 or 2 of Section A of the Annex to Regulation (EU) No 909/2014, involving the provision of services in relation to a securities issue namely (i) initial recording of securities in a book-entry system; or (ii) providing and maintaining securities accounts at the top tier level.