Commission Delegated Regulation (EU) 2016/438Show full title

CHAPTER 3 LOSS OF FINANCIAL INSTRUMENTS AND LIABILITY DISCHARGE (Article 24(1) of Directive 2009/65/EC)

Article 18 Loss of a financial instrument held in custody

1. The loss of a financial instrument held in custody within the meaning of the second subparagraph of Article 24(1) of Directive 2009/65/EC shall be deemed to have taken place where, in relation to a financial instrument held in custody by the depositary or by a third party to whom the safekeeping of financial instruments has been delegated in accordance with Article 22a of Directive 2009/65/EC, any of the following conditions is met:

(a) a stated right of ownership of the UCITS is demonstrated not to be valid because it either ceased to exist or never existed;

(b) the UCITS has been definitively deprived of its right of ownership over the financial instrument;

(c) the UCITS is definitively unable to directly or indirectly dispose of the financial instrument.

2. The ascertainment by the management or the investment company of the loss of a financial instrument shall follow a documented process readily available to the competent authorities. Once a loss is ascertained, it shall be notified immediately to investors in a durable medium.

3. A financial instrument held in custody shall not be deemed to be lost within the meaning of the second subparagraph of Article 24(1) of Directive 2009/65/EC where an UCITS is definitively deprived of its right of ownership in respect of a particular instrument, as long as that instrument is substituted by or converted into another financial instrument or instruments.

4. In the event of insolvency of the third party to whom the safekeeping of financial instruments has been delegated in accordance with Article 22a of Directive 2009/65/EC, the loss of a financial instrument held in custody shall be ascertained by the management company or the investment company as soon as one of the conditions listed in paragraph 1 is met with certainty.

There shall be certainty as to whether any of the conditions set out in paragraph 1 is fulfilled at the latest at the end of the insolvency proceedings. The management company or the investment company and the depositary shall monitor closely the insolvency proceedings to determine whether all or some of the financial instruments entrusted to the third party to whom the safekeeping of financial instruments has been delegated in accordance with Article 22a of Directive 2009/65/EC are effectively lost.

5. A loss of a financial instrument held in custody shall be ascertained irrespective of whether the conditions set out in paragraph 1 are the result of fraud, negligence or other intentional or non-intentional behaviour.

Article 19 Liability discharge

1. A depositary's liability under the second subparagraph of Article 24(1) of Directive 2009/65/EC shall not be triggered provided the depositary can prove that all the following conditions are met:

(a) the event which led to the loss is not the result of any act or omission of the depositary or of a third party to whom the safekeeping of financial instruments held in custody in accordance with point (a) of Article 22(5) of Directive 2009/65/EC has been delegated;

(b) the depositary could not have reasonably prevented the occurrence of the event which led to the loss despite adopting all precautions incumbent on a diligent depositary as reflected in common industry practice;

(c) the depositary could not have prevented the loss despite rigorous and comprehensive due diligence as documented by:

(i)

establishing, implementing, applying and maintaining structures and procedures and insuring expertise that are adequate and proportionate to the nature and complexity of the assets of the UCITS in order to identify in a timely manner and monitor on an ongoing basis external events which may result in loss of a financial instrument held in custody;

(ii)

assessing on an ongoing basis whether any of the events identified under point (i) presents a significant risk of loss of a financial instrument held in custody;

(iii)

informing the management company or the investment company of the significant risks identified and taking appropriate actions, if any, to prevent or mitigate the loss of financial instruments held in custody, where actual or potential external events have been identified which are believed to present a significant risk of loss of a financial instrument held in custody.

2. The requirements referred to in points (a) and (b) of paragraph 1 may be deemed to be fulfilled in the following circumstances:

(a) natural events beyond human control or influence;

(b) the adoption of any law, decree, regulation, decision or order by any government or governmental body, including any court or tribunal, which impacts the financial instruments held in custody;

(c) war, riots or other major upheavals.

3. The requirements referred to in points (a) and (b) of paragraph 1 shall not be deemed to be fulfilled in cases such as an accounting error, operational failure, fraud, failure to apply the segregation requirements at the level of the depositary or a third party to whom the safekeeping of financial instruments held in custody in accordance with point (a) of Article 22(5) of Directive 2009/65/EC has been delegated.