List of Abbreviations xvii
1 Introduction 1
1.1 Background 1
1.2 The Case for the Introduction of a Cross-Sectoral European Passport for Depositaries 2
1.2.1 Depositaries versus Custodians 4
1.2.2 Overcoming the ‘European Depositary Passport Paradox’ 5
1.2.3 The AIFMD/UCITSD V Depositary Passport ‘Investor Protection Concerns’ 6
1.2.3.1 The Concerns Raised upon Introduction of the ‘Management Passport’ under UCITSD IV 7
1.2.3.2 The Investor Protection Concerns upon Introducing an AIF/UCITS Depositary Passport 10
1.3 Research Questions 11
1.4 Methodology 12
1.5 Limitations 14
1.6 Scientific and Societal Relevance 15
1.6.1 Scientific Relevance 15
1.6.2 Societal Relevance: The Growing Importance of Depositaries 16
1.6.2.1 The Rise of European AuM 16
1.6.2.2 Possible Cost Reduction of a Depositary Passport 17
1.7 Study Outline 18
Part I The European Depositary
Passport Paradox
2 Locational Depositary Restrictions under the European Investment Laws 23
2.1 The European Depositary/Custodian Passport under European Investment Laws 23
2.1.1 The European Passport for ‘Custodians’ under MiFID II/CRD IV 23
2.1.2 The Location of the Depositary under the AIFMD and UCITSD V 24
2.1.2.1 The Location of the Depositary for UCITS 26
2.1.2.2 The Location of the Depositary for AIFs 29
2.1.2.3 Conclusion 33
2.1.3 The Depositary Mutual Recognition Approach under IORPD II 34
2.1.3.1 ‘Established in another Member State’ 35
2.1.3.2 Mutual Recognition under IORPD II – Applying to Depositaries and or Custodians? 35
2.1.3.3 Cooperation between Supervisory Authorities 37
2.1.3.4 Conclusion 37
2.1.4 Conclusion 38
2.2 The European Depositary Passport Debate 39
2.2.1 UCITSD I-VI 39
2.2.1.1 UCITSD I 39
2.2.1.2 UCITSD II 41
2.2.1.3 UCITSD III/IV 43
2.2.1.4 UCITSD V/VI 46
2.2.2 The AIFMD 48
2.2.3 ISD-MiFID I/II/Second Banking Directive- CRD IV 48
2.2.4 IORPD I/II 50
2.2.5 Conclusion 51
2.3 Conclusion 52
Part II The EEA’s Approach towards the Cross-Border Provision of Financial Services
3 EEA Cross-Border Regulation for Financial Intermediaries 57
3.1 The Internal Dimension of the Cross-Border Provision of Financial Services 58
3.1.1 A Law and Economics Theory of the Internal Market for Financial Services 59
3.1.1.1 Market Efficiency and Economies of Scale and Scope 59
3.1.1.2 Risk Asymmetry and the Concept of ‘Production’ and ‘Distribution’ Member States 62
3.1.1.3 EEA Law as a Substitute for Risk Asymmetry 64
3.1.2 The Internal Dimension – The Four Freedoms 65
3.1.2.1 The Freedom of Capital 65
3.1.2.2 The Freedom of Establishment 66
3.1.2.3 The Freedom to Provide Services 67
3.1.2.4 Overlapping Fundamental Freedoms 68
3.2 The Joint Principles of the European Passport of EEA Financial Intermediaries 69
3.2.1 An Internal Market for Financial Intermediaries 69
3.2.2 The General Concept of the ‘European Passport’ 71
3.2.3 Positive Integration and EU Legal Instruments 71
3.2.3.1 The Choice of EU Policy Instruments 72
3.2.3.2 The Principles of Subsidiarity and Proportionality 74
3.2.3.3 The Lamfalussy Process 75
3.2.3.4 The Trend towards Maximum Harmonization 75
3.2.4 The Cornerstones of the European Passport for Financial Intermediaries: the ‘Single Rulebook’, ‘Home Country Control’ and the ESFS 76
3.2.4.1 The European Passport Substantive Legal Framework: ‘The single rulebook’ 77
3.2.4.2 The EEA Financial Supervisory Framework: Home Country Control and the ESFS 81
3.2.5 Conclusion 83
3.3 The External Dimension of the Cross-Border Provision of Financial Services 84
3.3.1 The External Dimension – A Law and Economics Theory 85
3.3.1.1 TC Financial Services and the EEA’s External Dimension 85
3.3.1.2 Risk Asymmetry, TC Financial Centres and the Concept of ‘Production’ and ‘Distribution’ States 86
3.3.1.3 Equivalency as a Substitute for Risk Asymmetry 87
3.3.2 EEA Financial Intermediaries with an External Dimension 89
3.3.2.1 ‘Qualifying Holding’ and ‘Close Links’ Requirements for Non-EEA Shareholders 90
3.3.2.2 Delegation 90
3.3.2.3 Consolidated Supervision and Conglomerates 93
3.3.3 Financial Intermediaries within the EEA 104
3.3.3.1 ‘Stand-alone’ Authorizations 105
3.3.3.2 European Passports for TC Financial Intermediaries 111
3.3.3.3 The (Mutual) Agreements Solution 115
3.3.4 EEA Financial Intermediary TC Market Access 118
3.3.4.1 The EU Commission Negotiation Mandate 118
3.3.4.2 The (Mutual) Agreements Solution under the Commission Negotiation Mandate 119
3.4 The Joint Principles of EEA TC Financial Intermediary Regulation 120
3.4.1 Third Countries and EEA Secondary Law 120
3.4.1.1 The Internal Dimension – The Four Freedoms 120
3.4.1.2 The External Dimension: International Law Commitments and EEA Secondary Law 121
3.4.2 Equivalency in EEA Secondary Law 122
3.4.2.1 Equivalency of TC Regulatory and Supervision Regimes 122
3.4.2.2 Cooperation Agreements 125
3.4.2.3 Information Exchange 126
3.4.2.4 ‘Legal Representation’ in the EEA 127
3.4.3 The EEA’s Centralized Rulemaking and Supervision 129
3.4.3.1 The Role of the European Commission in Centralized Rulemaking 129
3.4.3.2 The Role of ESAs in TC Regimes 130
3.4.4 Judicial Control 131
3.5 Conclusion 132
Part III Depositaries vs. Custodians
4 The AIFMD and UCITSD V Depositary Regulation 137
4.1 Introduction 137
4.2 The Scope of the AIFMD and UCITSD V with regard to Depositaries 138
4.2.1 The Obligation to Appoint a Depositary under the AIFMD 138
4.2.1.1 General Rule 139
4.2.1.2 The Retail-AIF Depositary 139
4.2.1.3 Exemptions from the Depositary Obligation 141
4.2.1.4 Depositary-Lite Regime 145
4.2.2 The Obligation to Appoint a Depositary under the UCITSD V 146
4.3 Entities Eligible as a Depositary and Its Organizational Requirements 147
4.3.1 Entities Eligible as a Depositary under the AIFMD 147
4.3.1.1 Credit Institution 147
4.3.1.2 Investment Firm 148
4.3.1.3 Other Eligible Institutions 148
4.3.1.4 Prime Broker 150
4.3.1.5 Eligible Non-EEA Entities 151
4.3.1.6 Option for Private Equity Funds, Venture Capital Funds and Real Estate AIFs 151
4.3.2 Entities Eligible as a Depositary under UCITSD V 154
4.3.2.1 National Central Bank 155
4.3.2.2 Credit Institutions 156
4.3.2.3 Another Legal Entity 157
4.4 EEA-AIF and UCITS Depositaries – General Requirements 164
4.4.1 Duty of Loyalty 164
4.4.2 Conflicts of Interest 164
4.4.3 The Third Party Depositary Requirement 165
4.4.4 Independence Requirements under UCITSD V 167
4.4.4.1 Common Management/Supervision 167
4.4.4.2 Cross-Shareholdings/Group Inclusion 168
4.5 AIFMD Third-Country Depositaries 170
4.5.1 Additional Requirements for TC Depositaries 170
4.5.2 The Third-Country Depositary and ‘Effective Prudential Regulation’ 171
4.5.2.1 Effectively Enforced Prudential Regulation 171
4.5.2.2 ‘Supervision under Equivalent’ to That Applicable under EEA Law 172
4.6 The Depositary and Its Functions 173
4.6.1 The Particulars of the Written Contract 173
4.6.1.1 Eligible Assets 174
4.6.1.2 Flow of Information 175
4.6.1.3 Escalation Procedure 175
4.6.1.4 Third Parties 176
4.6.1.5 Termination of the Contract 176
4.6.2 Safekeeping 176
4.6.2.1 Financial Instruments That Should Be Held in Custody 177
4.6.2.2 Safekeeping Duties with regard to Assets Held in Custody 178
4.6.2.3 ‘Other Assets’ 180
4.6.2.4 Safekeeping Duties regarding Ownership Verification and Record-keeping 181
4.6.3 Control 183
4.6.3.1 Oversight Duties – General Requirements 183
4.6.3.2 Subscriptions/Redemptions 184
4.6.3.3 Valuation of Shares/Units 186
4.6.3.4 AIFM’s/UCITS ManCo Instructions 187
4.6.3.5 The Timely Settlement of Transactions 188
4.6.3.6 AIF’s Income Distribution 188
4.6.3.7 Monitoring of the AIF’s/UCITS’ Cash Flows 189
4.6.3.8 UCITS Mergers and Master–Feeder Structures 192
4.7 Delegation in the Depositary Chain 195
4.7.1 Avoiding Requirements 197
4.7.2 Objective Reason 197
4.7.3 Due Diligence 197
4.7.3.1 Due Diligence upon Appointment of the Subcustodian 198
4.7.3.2 Ongoing Monitoring Diligence Sub-custodian 199
4.7.3.3 Insolvency Protection of UCITS Assets 204
4.7.4 Lex Specialis – The Prime Broker as a Sub-custodian under the AIFMD 208
4.8 The Depositary’s Liability Regime under the AIFMD and UCITSD V 211
4.8.1 The Depositary’s Liability under the AIFMD and UCITSD V 212
4.8.1.1 Loss of Financial Instruments That Can Be Held in Custody 213
4.8.1.2 The AIFMD and UCITSD V Liability Discharge 215
4.8.1.3 The AIFMD Contractual Discharge of Liability 218
4.8.2 The Impact of the AIFMD/UCITSD V Liability Regime for Depositaries 219
4.8.3 Rights of the AIFM/UCITS ManCo and Investors against the Depositary 223
4.8.3.1 AIFMD 223
4.8.3.2 UCITSD V 225
4.8.4 Conclusion 226
4.9 The Depositary under the ‘AIFMD/UCITSD V Product Regulations’ 227
4.9.1 The ELTIFR Depositary Regime 228
4.9.2 The MMFR Depositary Regime 230
4.9.3 The EuVECAR/EuSEFR ‘Depositary Regime’ 230
4.9.4 The AIFMD Product Regulation Depositary Regimes versus the AIFMD/UCITSD V 232
4.10 Conclusion 233
5 The IORPD II Depositary Regime 235
5.1 Introduction 235
5.2 The Appointment of Depositaries under IORPD II 236
5.2.1 The Appointment for Full DC and Other Types of IORPs 236
5.2.1.1 Full DC IORPs 237
5.2.1.2 Other Types of IORPs 238
5.2.2 Investment Risks – Full DC, Hybrid and/or Full DB IORPs? 239
5.2.3 The Definition of a ‘Depositary’ under IORPD II 241
5.2.4 The Appointment of a Single Depositary versus Multiple Depositaries 243
5.2.4.1 The Inconsistency of the ‘Depositary’ Terminology under IORPD II 243
5.2.4.2 The Unclear ‘Depositary’ definition under IORPD II 245
5.2.5 The Discretionary Choice of Member States for a ‘Depositary’ or ‘Custodian’ under IORPD II 247
5.3 The IORPD II Substantive Depositary Regime 249
5.3.1 The Scope of the IORPD II ‘Substantive’ Depositary Regime 249
5.3.2 Entities Eligible as a Depositary and Its Organizational Requirements 252
5.3.2.1 Entities Eligible 252
5.3.2.2 The AIFMD Depositaries Eligible 254
5.3.3 IORP Depositaries – General Requirements 257
5.3.3.1 The Duty of Loyalty 257
5.3.3.2 Conflicts of Interest 257
5.3.4 The IORPD II Depositary and Its Functions 259
5.3.4.1 Particulars of the Written Depositary Contract 259
5.3.4.2 Safekeeping 260
5.3.4.3 Control 261
5.3.5 Delegation in the Depositary Chain 264
5.3.6 The Depositary Liability Regime 265
5.4 ‘Equivalent Protection’ for IORPs without a Depositary Appointed 266
5.4.1 IORPs without a Depositary Appointed for Safekeeping 267
5.4.1.1 Financial Instruments Subject to Due Care and Protection 267
5.4.1.2 ‘Equivalency Protection’ Criticism 270
5.4.2 IORPs without a Depositary Appointed for Oversight Duties 270
5.4.2.1 Oversight Duties Duly Performed within the IORP 271
5.4.2.2 Equivalent Protection for Oversight Duties? 273
5.4.2.3 Tasks Subject to Oversight by Depositaries 273
5.5 Conclusion 274
6 The CRD IV, MIFID II and the CSDR ‘Custodian Regime’ 277
6.1 Introduction 277
6.2 The ‘Custodian’ under CRD IV and MiFID II 278
6.2.1 ‘Safekeeping and Administration Services’ as an ‘Ancillary Service’ 278
6.2.1.1 Credit Institutions under CRD IV 278
6.2.1.2 Investment Firm under MiFID II 279
6.2.2 The MiFID II versus CRD IV Definition of ‘Safekeeping and Administration Services’ 280
6.2.2.1 The Safekeeping and Administration of Financial Instruments for the Account of Clients 280
6.2.2.2 Custodianship and Related Services Such As Cash and Collateral Management 284
6.2.2.3 Exclusion: Securities Accounts at Top Tier Level 284
6.2.3 Conclusion 285
6.3 The (Investor) CSD 285
6.3.1 CSDs under the CSDR 286
6.3.1.1 Core Services 286
6.3.1.2 Non-banking-type Ancillary Services of CSDs 288
6.3.1.3 Banking-type Ancillary Services 289
6.3.2 Conclusion 289
6.4 The MiFID II Client Asset Requirements 290
6.4.1 General and Specific Organizational Requirements 290
6.4.2 Safeguarding of Client Financial Instruments and Funds 291
6.4.2.1 General Regime 292
6.4.2.2 Equivalent Measures Achieving the Same Level of Protection 293
6.4.2.3 Inappropriate Custody Liens over Clients Assets 294
6.4.2.4 Information and Record-keeping 294
6.4.3 Depositing Client Financial Instruments 295
6.4.4 Depositing Client Funds 297
6.4.4.1 Eligible Entities for Depositing Client Funds 297
6.4.4.2 Depositing Client Funds – Due Diligence Requirements 298
6.4.4.3 Due Diligence – The Diversification of Client Funds 298
6.4.4.4 Intra-Group Deposits of Client Funds 299
6.4.5 The Use of Client Financial Instruments 300
6.4.5.1 General Regime 300
6.4.5.2 Unintended use of Client Financial Instruments 301
6.4.5.3 SFTs and Collateralization 302
6.4.6 SFTs and TTCA 302
6.4.7 Inappropriate Use of TTCA 303
6.4.7.1 TTCA 304
6.4.7.2 Appropriateness of TTCAs 304
6.4.8 Governance Arrangements Concerning the Safeguarding of Client Assets 305
6.4.9 Reports by External Auditors 305
6.5 Conclusion 306
7 Depositary versus Custodian Regulation 309
7.1 Authorization 310
7.1.1 Credit Institutions, Investment Firms and ‘Equivalent Other Legal Entities’ 310
7.1.2 Authorization Requirements 313
7.2 Business Organizational Requirements 314
7.2.1 The Internal Dimension: Depositaries versus Custodians – Key Risks 315
7.2.1.1 The Segregation of Assets and Third Party Custody 315
7.2.1.2 Safekeeping 316
7.2.1.3 Oversight Duties 321
7.2.2 External Dimension: Depositaries versus Custodians as Risk-Mitigation Mechanism 321
7.2.2.1 Segregation of Assets and Third party Custody 321
7.2.2.2 Safekeeping, Administration and ‘Other Valueadded Services’ 325
7.2.2.3 Oversight Duties 326
7.3 Prudential Requirements 328
7.3.1 The Depositary/Custodian as a Counter-party 328
7.3.1.1 Cash 328
7.3.1.2 Financial Instruments That Can Be Held in Custody 329
7.3.1.3 ‘Other Assets’ 330
7.3.2 Prudential Requirements related to Credit Institutions, Investment Firms and ‘Equivalent Other Legal Entities’ 331
7.3.2.1 Credit institutions and Investment Firms 331
7.3.2.2 ‘Equivalent Other Legal Entities’ 333
7.4 Supervision 333
7.4.1 The European Supervisory Architecture 333
7.4.2 Equivalent Other Legal Entities 335
7.5 Conclusion 335
Part IV Towards a Cross-Sectoral Depositary Passport
8 Towards the Introduction of a Cross-Sectoral European Depositary Passport in European Investment Law 339
8.1 A Cross-Sectoral Passport for European Depositaries and Custodians – The ‘Custody Plus’ Solution 339
8.1.1 The ‘EEA Cross-Sectoral Investment Management Passport’ as an Example 340
8.1.2 The Basic Foundation of the Cross-Sectoral Depositary Passport: The MiFID II ‘Stand-Alone’ Custodian 341
8.1.2.1 Considerations on a Cross-Sectoral European/TC Depositary Passport 341
8.1.2.2 Credit Institutions and Investment Firms as Full- Fledged MiFID II Custodians 343
8.1.2.3 Credit Institutions and Investment Firms as (‘Cross-Sectoral’) Eligible Depositary Entities 345
8.1.3 The Depositary as ‘Custody plus’ under Sectoral Regulations 348
8.2 ‘Custodianship’, a Stand-Alone Investment Service/Activity under MiFID II 349
8.2.1 Defining ‘Custodianship’ as Stand-Alone Investment Service/Activity 349
8.2.2 Authorization Requirements and Operational Conditions 351
8.3 The Depositary as ‘Custody Plus’ under Sectoral Regulations 352
8.3.1 The AIFMD and UCITSD V Depositary Regime – Towards Alignment? 352
8.3.2 The IORPD II Depositary Regime – A Proposal 354
8.4 Conclusion 356
9 Conclusion 359
9.1 The European Depositary Passport Paradox 359
9.2 The EEA’s Approach towards the Cross-Border Provision of Financial Services 361
9.3 Depositaries versus Custodians 365
9.4 Towards a Cross-Sectoral Depositary Passport 366
Bibliography 369
