ESMA opines on EU harmonization for safe-keeping of assets

The European Securities and Markets Authority (ESMA) has published an opinion to the European Commission, the Council, and the Parliament (EU institutions) under Article 34 of the ESMA Regulation.

The purpose of the opinion is twofold:

  1. to provide an EU framework with strong client asset protection, especially in insolvency, for the safe-keeping of assets which are, in accordance with both AIFMD and UCITS Directive, required to be held in custody, and
  2. to provide clarification in the AIFMD and UCITS Directive regarding the application of the relevant depositary rules in the case of CSDs, ensuring a consistent approach across the EU.

The policy goal is to provide an EU framework with strong client asset protection, especially in insolvency, for the safe-keeping of assets which are, in accordance with both UCITS and AIFM Directives, required to be held in custody. Insolvency and property law are different in all EU jurisdictions. A given type of segregation model intended to provide strong protection in one jurisdiction may in fact, offer more, less, or no change in protection if imposed on other jurisdictions.

In addressing the EU institutions on the optimal approach to asset segregation of financial instruments under the AIFMD and UCITS Directive, ESMA suggests defining a regime which ensures:
a) assets are clearly identifiable as belonging to the AIF/UCITS, consistent with any reuse (where this is permitted by the applicable legislation), and
b) investors receive adequately robust protection by avoiding the ownership of the assets being called into question in case of the insolvency of any of the entities in the custody chain.

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