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Six SS takes sides with Euroclear
13 December 2013
Growing rift in CSD market over section in AIFM directive where banks can avoid or reduce liability for loss of assets. Stephanie Baxter reports
SIX Securities Services
Central securities depositories (CSDs) should be exempt from
the liability provisions of the Alternative Investment Fund
Managers (AIFM) directive even where these entities use
sub-custodians for safekeeping of assets, according to Six
The firm revealed its stance following an exclusive report by
Global Investor/ISF [http://bit.ly/1ivCdnt] about a
rift in the CSD market over the interpretation of a provision
in the depositary liability regime of the AIFM directive where
services are provided by securities settlement systems (SSSs)
– which are run by CSDs.
The directive imposes strict liability on depositary banks for
loss of assets with few exceptions.
The provision says that depositary banks are not liable for
assets lost at an SSS. This has led the large custodian
banks - which can set up depositary bank
licences under the AIFM directive
- to consider how holding assets
directly with a CSD would help them reduce
liability but there has been wide disagreement over what
services of an SSS the exemption covers.
One camp – which includes Euroclear –
believes safekeeping agents are a necessary part of the CSD
infrastructure and that depositary banks should not be liable
Alex Merriman, head of market policy at the Swiss
infrastructure, Six Securities Services added: "We completely
share Euroclear’s interpretation about the AIFM
directive liability provision not applying to CSDs. It is
not as if this is a completely unregulated part of the
business: we are subjected to stringent regulatory controls on
the selection and maintenance of sub-custodian accounts."
CSDs have direct links with other CSDs but in some cases they
have indirect links when they hold securities through
sub-custodians to link with other CSDs.
Ilse Peeters, director in Euroclear’s public
affairs division, told Global Investor/ISF at the end
of November: "If a depositary bank deposits assets in an SSS it
is not subject to the AIFM directive liability clauses
regardless of the way the SSS holds the assets.
"As a market infrastructure, we are regulated more strictly
than sub-custodians and also where we have indirect links, we
are subject to very strict rules. The current debate
centers around the functional way in which the market
works but the proposed regulation is actually institutional."
Merriman said it is "unhelpful" to draw questions over the
institutional or otherwise nature of an SSS.
"If you start trying to nitpick, you risk undermining the
unitary definition and interpretation of an SSS under existing
adopted legislation such as Emir."
The opposing camp takes the view that depositary banks would be
able to avoid liability only where the safekeeping chain
contains infrastructure entities – where it does not
include underlying sub-custodians.
Philip Brown, head of global client relations and member of the
executive board at Clearstream, told Global
Investor/ISF at the end of November that there
are risks for its clients relying completely on the
liability exemption, especially where sub-custodians are used
in the CSD chain.
"The approach we have taken is, we believe, a prudent and
logical one, which attempts to align us with what a court might
rule in the event of a loss," he added.