The Council of the European Union has agreed on a draft for an amendment to the UCITS Directive that would tighten rules for delegating custodial services.

The Permanent Representatives Committee of the Council said amendments on UCITS had become necessary because the interpretation of the current directive had had “consequences that came to the fore following the Lehman bankruptcy and the Madoff fraud case”.

The Council said: “The depositary is liable for losses suffered as a result of a failure to perform its duties, though the precise contours of those duties is defined by the laws of the member states.

“As a result, different approaches have developed across the EU.”

In the most recent draft of the Directive, the Council states: “It is necessary to clarify that a UCITS should appoint a single depositary having general oversight over the UCITS’s assets.”

Only certain custodial services such as the physical safekeeping of the assets can be outsourced under UCITS V, but other services such as the actual oversight of sales and evaluations can no longer be delegated to third parties.

“In order to ensure a harmonised approach to the performance of depositaries duties in all member states irrespective of the legal form taken by the UCITS,” the Council continued, “it is necessary to introduce a uniform list of oversight duties that are incumbent on both a UCITS with a corporate form (an investment company) and a UCITS in a contractual form.”

Another point clarified in the draft was the outsourcing of certain services to securities settlement system (SSS).

Some commentators had argued that the AIFM Directive had opened a loophole for banks to evade liability for assets in custody by using central securities depositories (CSD) in which they would still hold the assets under custody directly.

According to the AIFMD, delegating custody services triggers liability, but analysts disagreed on whether using an SSS would also qualify as a delegation. 

The draft on a new UCITS Directive now clearly states “entrusting the custody of securities of the UCITS to a CSD, or to a third-country CSD, should be considered a delegation of custody function”.

The Council noted the “revised compromise, as set out in document 17095/13, is now supported by a strong qualified majority of delegations” and would now be put before the European Parliament.

However, the Council added that “some isolated concerns” remain in relation to sanctions, depositary liability and eligibility of entities to perform depositary functions.