Monthly Archives: December 2013

INDOS Financial & Cordium – AIFMD Depositary Webinar

INDOS Financial’s Bill Prew participated in a Cordium briefing on the AIFMD depositary regime. The webinar was designed to provide a practical overview of the requirements, including choices managers face when considering which models to employ and what is required for the FCA AIFMD variation of permission applications. To listen to the webinar and view the accompanying slides click here.

AIFMD Depositary-lite: The Case for Provider Regulation

Over recent weeks, a number of independent hedge fund administrators have announced they intend to launch AIFMD depositary-lite operations, whereas others do not plan to follow suit. Those that have announced plans share one thing in common – they currently perform hedge fund administration services mainly from Ireland where they are regulated by the Central Bank of Ireland (CBI).

To date, the only guidance issued by the CBI about the regulatory requirements for Irish firms wishing to undertake depositary-lite duties is set out in an AIFMD Q&A document from May 2013. It states that, whilst Article 36 of the AIFMD does not set out eligibility criteria for entities performing the depositary-lite duties, if an Irish entity proposes to provide such services it must determine whether authorisation under the Irish Investment Intermediaries Act 1995 might be necessary. Since May, there has been no official update from the CBI. Speaking at the GAIM Ops International conference in Paris in November, the head of markets policy at the CBI was reported to have said standalone fund administrators would have to provide comfort to regulators that they can manage any conflicts of interest or capacity issues should they provide depositary-lite activities and that it was considering the situation.

Of the administrators seeking to launch depositary-lite businesses, one has decided to seek FCA authorisation as an Article 36 Custodian, the UK’s regulatory authorisation for any UK firm undertaking any of the depositary-lite duties. We understand a second firm is also planning to take this route. One administrator has established an unregulated sister entity to its existing administration business in Ireland to perform the depositary-lite cash flow monitoring and oversight duties (two of the three depositary-lite duties).

No doubt the firms seeking authorisation in the UK partly reflects the lack of clarity in Ireland, but also the fact that in future, if the AIFMD passport is extended to non-EU AIF, the depositary must be domiciled in the domicile of the manager (most likely the UK) or the fund (most likely the Cayman Islands). As it stands, an Irish entity would not be able to act as the depositary. One major established depositary is also planning to provide depositary-lite services to non-EU firms from the UK, even though they have a long-established Irish operation. Establishing a UK authorised firm therefore not only sets a depositary firm on the path to enable compliance with this future requirement, but it also provides hedge fund managers themselves with certainty they are selecting a provider which holds the necessary regulatory authorisation rather than asking them to bear the risk of regulatory challenge or change in Ireland.

Given the 22 January 2014 deadline set by the FCA for managers to submit their AIFMD variation of permission (VOP) applications, time is running out for managers to identify a shortlist of providers that are operationally ready and willing to act as depositary-lite providers. The FCA has recently issued a Q&A and a separate guidance note (the most recent can be found by clicking here) which clarifies its expectations around the identification of depositary providers in section 9 of the VOP applications. The FCA recommends that firms should consider depositary arrangements, and as a minimum provide a shortlist of prospective depositaries, before applying for authorisation. With over 750 offshore hedge funds alone expected to require a depositary-lite solution in order to continue to be marketed post 22 July 2014, there will be capacity constraints in the depositary market and delaying decisions could mean managers run up against these constraints and also run the risk that the FCA will reject VOP applications which do not meet expectations. Given the pressure to make decisions, many managers are becoming frustrated by the lack of clarity and preparedness on the part of firms that have only recently decided to develop a depositary-lite service.

Back to the subject of regulation of depositary-lite businesses, ultimately we believe there is a real risk the CBI will in time require Irish firms to be regulated to undertake depositary-lite duties. Given there is over $1 trillion of non-Irish, non-EU alternative investment fund Assets under Management administered by Irish administrators, there must be concerns about unregulated Irish entities undertaking fiduciary activities over this level of assets. There are clearly reputational risks to the Irish industry and without regulating these activities, how can appropriate standards be set and enforced? There are already differences between regulatory standards for trustee or depository activities across Europe (and consequently different service standards particularly around frequency of NAV review and monitoring of compliance with investment guidelines) and these will be magnified where depositary-lite businesses are not subjected to appropriate regulatory oversight.

AIFMD itself places the onus squarely on managers to ensure appropriate firms are appointed to perform the depositary lite duties. We expect many managers and their directors and investors will ultimately question the suitability of unregulated firms performing an important fiduciary function.


Managers wishing to perform due diligence over depositary-lite providers may find our Hedge Fund Manager Depositary Selection Checklist useful.

Further FCA guidance: Information required on AIFMD depositaries

The FCA has published further guidance about the information it will require from alternative investment fund managers in their Variation of Permission applications in January 2014. The key elements are reproduced below:

• Article 8(5) of the AIFMD does not require an applicant to provide information on their depositary arrangements for the application to be deemed complete.

• Firms can submit a VoP before the depositary arrangements for their AIFs are finalised, but firms should not leave Section 9 (depositary arrangements) blank.

• Where depositary arrangements have not been finalised, firms should complete Section 9 with the name of the intended depositary and details of when firms expect to be able to finalise their contractual arrangements.

• If a depositary has not yet been selected, firms should state that depositary arrangements are to follow.

• Firms should include a brief description of the due diligence that they have or will undertake on that depositary.

• Firms should ensure there will be enough time to conclude contractual terms with the chosen depositary before the anticipated date of authorisation.

• Firms should consider the need for depositaries to do their own due diligence as part of this process, and the likelihood that they may need to also engage with a large number of clients.

The full guidance note can be found at

The Hedge Fund Manager’s Guide to AIFMD Depositary Selection

This INDOS Financial article was first published by HFM Week and can be viewed by subscribers at

Many EU hedge fund managers will need to comply with new requirements under the Alternative Investment Fund Managers Directive (AIFMD) to appoint a depositary. The exact requirements will depend on a combination of the domicile of the managers, their hedge funds and how they are being marketed. The requirements can be broadly summarised as follows

1.      All EU-domiciled Alternative Investment Funds (AIF) managed by EU Alternative Investment Fund Managers (AIFM) are required to appoint a single depositary (Article 21);

2.      EU-AIFM managing non-EU AIF must comply with the ‘depositary-lite regime’ (Article 36) if the AIF is being marketed to EU investors through private placement; and

3.      Non EU-AIFM managing either EU or non-EU AIF are subject to Article 42. Whilst Article 42 does not impose any depositary requirements, some countries (including Germany and Denmark) are imposing a depositary-lite requirement in order to market these funds into their countries.

Regardless of the regime which will apply, hedge fund managers will need to undertake due-diligence over their depositary providers. In particular, UK managers will need to provide a summary of the due diligence undertaken in their AIFMD Variation of Permission applications to the Financial Conduct Authority, and be in a position to share further details of the due diligence undertaken on request by the FCA.

Very little has been written about what AIFMD depositary due diligence will involve. We set out below a number of factors which hedge fund managers, particularly those seeking to comply with the depositary-lite requirements, can consider.

Regulatory Authorisation. Any UK firms undertaking AIFMD depositary duties will need to hold a authorisation, whereas overseas firms may not be subject to regulation. We suggest that investors and managers will be more comfortable with a regulated firm.

Experience of complex strategies. Many depositaries are experienced in long-only strategies but what experience do they have over complex derivatives and more complex hedge fund strategies.

Financial strength. Financial strength is of primary importance for EU funds where the depositary is required to take on the strict liability for loss of financial instruments. This does not apply in depositary-lite but nevertheless if things go wrong and depositaries are found to have been negligent, can the depositary foot the bill? Depositaries which form part of broader financial services group will be perceived to offer ‘deep pockets’ protection, but how is the depositary unit capitalised and what parent guarantees exist to back up the depositary in the event of their negligence? Independent providers may not have the same deep pockets, but if regulated, will be required to maintain minimum levels of regulatory capital and should maintain adequate professional indemnity insurance.

Legal and commercial terms. Depositary agreements are not new and firms should be prepared to share their standard terms. Depositaries should be operating to a negligence standard and not seek to cap their liability.

Operating models and Service levels. Different depositaries will have different operating models and service levels and different regulators have different expectations. Key areas include the frequency of reviews around investment guideline monitoring, fund valuations and how depositaries meet the enhanced AIFMD cash flow monitoring requirements. Depositaries should be transparent about the procedures they will perform and their frequency (daily/ weekly/ monthly/ quarterly or annually).

Depositaries which take a flexible and pragmatic approach (particularly in the depo-lite context) should not have a significant operational impact on managers since they should simply work closely with existing service providers. Will the depositary establish a service level agreement which will govern the information flow between the depositary, manager and administrator?

Systems and Controls Assurance. What systems does the depositary employ and will it provide a regular independent controls assurance report such as a SOC1 or ISA3402 report? Review the exceptions in the most recent report.

Independent vs. Affiliate model. Where the depositary provider will oversee an affiliated fund administrator, how does it manage the potential conflict of interest presented by this model?

Value Proposition. Whilst the primary responsibility of the depositary is to act fairly and in the best interests of investors, depositaries should be able to articulate how their activities will add value to the manager and the fund. In so doing, depositaries turn this aspect of the AIFMD into a positive for managers and investors in return for the costs incurred. 

Transparency and Reporting. Like any other service provider, depositaries should be held accountable for their work. As a minimum, depositaries should provide a summary of their findings each month to the manager and a formal written service report on a quarterly basis to the manager and board of the fund. This should be part and parcel of the core service. Reports should be transparent about the work undertaken and the results.

Past Claims. Has the depositary been subject to any past claims where the depositary was found to have been negligent? What circumstances gave rise to the claims and have procedures been enhanced as result?

Escalation Process. How will issues be escalated and in what kind of circumstances would issues be escalated to the board of the fund and potentially regulators?

Cost. Are the proposed depositary fees competitive? Will the depositary consider fee caps or fixed fees depending on complexity of strategy?

In conclusion, whilst this may seem like a long list of points to consider, all depositaries should be prepared to provide clear responses. Only then can managers compare and contrast different providers and make decisions that are in their best interests and, since the fund is paying for the service, their investors. INDOS has prepared a detailed due diligence questionnaire to enable managers assess providers. Please click here to download.


AIFMD Depositary INDOS Financial Selects Eze Castle Integration Private Cloud Solution

Eze Castle Integration, Ltd, a leading provider of strategic IT solutions and private cloud services to hedge funds and investment firms, today announced that INDOS Financial has selected the Eze Private Cloud as its hosted technology platform. Eze Castle’s award-winning cloud services provide INDOS a highly reliable and secure IT solution that simplifies operations.

INDOS Financial, founded late 2012, is an independent Alternative Investment Fund Managers Directive (AIFMD) depositary provider that specialises in providing a depositary-lite solution to offshore hedge funds. INDOS evaluated multiple private cloud solutions and ultimately selected the Eze Managed Suite offering, which is powered by the Eze Private Cloud. The Eze Managed Suite gives INDOS a complete IT solution that includes file services, email, key business applications, mobile services, email security, disaster recovery and 24x7x365 all-inclusive support.

“We have a very targeted plan for growth and our chosen technology partner must deliver outstanding IT services and support so we can focus on our clients,” said Bill Prew, Founder and CEO at INDOS Financial. “Eze Castle Integration stood out amongst the competition based on its reputation, global presence and premier private cloud infrastructure. Since go-live on the Eze Private Cloud we have received excellent support.”

More than 2,500 investment professionals around the world use the Eze Private Cloud. It is a robust, secure infrastructure that spans three continents and delivers a range of services, including Eze Managed Suite, Eze Managed Infrastructure and Eze Managed Data Protection. The company’s cloud services give firms seamless access to technology and over 80 applications to ensure firms operate at the highest level of efficiency without the challenges of major capital expenditures or budgeting for hardware and software upgrade lifecycles.

“Flawless IT and business operations are essential components to attracting and maintaining clients in today’s market. Eze Castle Integration understands this and is focused on delivering outstanding technology and supporting services to our clients worldwide,” said Serge Bukhar, senior vice president at Eze Castle Integration.

About Eze Castle Integration
Eze Castle Integration ( is the leading provider of IT solutions and private cloud services to the investment industry. The company’s products and services include Private Cloud Services, Technology Consulting, Outsourced IT Support, Project & Technology Management, Professional Services, Telecommunications, Business Continuity Planning and Disaster Recovery, Archiving, Storage, Colocation and Internet Service. Eze Castle Integration is headquartered in Boston and has offices in Chicago, Dallas, Hong Kong, London, Los Angeles, Minneapolis, New York, San Francisco, Singapore and Stamford.

About INDOS Financial
INDOS Financial ( is an independent AIFMD depositary business which expects to shortly receive its final FCA authorization. INDOS provides a flexible and pragmatic depositary-lite solution for any hedge fund manager that wishes to market its non-EU hedge funds to EU following the introduction of the AIFMD. INDOS is the only independent provider specializing in hedge funds and is currently in the process on on-boarding its initial clients prior to UK managers submitting their ‘Variation of Permission’ applications to the FCA by 22 January 2014.