The Alternative Investment Fund Managers Regulations 2013

Depositary liability for loss of financial instruments held in custody

30.—(1) This regulation applies where a financial instrument held in custody in accordance with Article 21.8(a) of the directive by the depositary or a third party to whom the custody has been delegated or sub-delegated is deemed to have been lost under Article 100 of the Commission Delegated Regulation.

(2) Subject to paragraphs (3) and (4), the depositary must return a financial instrument of the identical type or the corresponding amount to the AIF, or the AIFM acting on behalf of the AIF, without undue delay.

(3) The depositary is not required to comply with the obligation in paragraph (2) if it can prove that the loss arose as a result of an external event beyond the depositary’s reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.

(4) The depositary is not required to comply with the obligation in paragraph (2) if it can prove that—

(a) the lost financial instrument was held in custody by a third party;

(b) the depositary had delegated its functions to the third party in accordance with implementing provisions relating to the second paragraph of Article 21.11 of the directive;

(c) a written contract between the depositary and the third party—

(i) expressly transfers the obligation in paragraph (2) to the third party; and

(ii) enables the AIF, or the AIFM acting on behalf of the AIF, to make a claim against the third party in respect of the loss of the financial instrument, or for the depositary to make such a claim on their behalf; and

(d) a written contract between the depositary and the AIF, or the AIFM acting on behalf of the AIF, expressly allows a transfer of the depositary’s obligation in paragraph (2) and establishes an objective reason for the transfer.

(5) A third party (“A”) to which custody of a financial instrument has been delegated and to which the obligation in paragraph (2) has been transferred in accordance with paragraph (4) is not required to return a financial instrument of the identical type or corresponding amount to the AIF, or the investors of the AIF, if it can prove that—

(a) the lost financial instrument was held in custody by another third party (“B”);

(b) A had sub-delegated its functions to B in accordance with implementing provisions relating to the second paragraph of Article 21.11 of the directive;

(c) a written contract between A and B—

(i) expressly transfers from A to B the obligation to return a financial instrument of the identical type or corresponding amount to the AIF, or the investors of the AIF; and

(ii) enables the AIF, or the AIFM acting on behalf of the AIF, to make a claim against B in respect of the loss of the financial instrument, or for the depositary to make such a claim on their behalf; and

(d) a written contract between A and the depositary expressly allows a transfer of A’s obligation to return a financial instrument of the identical type or corresponding amount to the AIF, or the investors of the AIF, and establishes an objective reason for the transfer.

(6) Irrespective of any contractual arrangements that provide otherwise, but subject to paragraphs (4) and (5) and regulation 32(2), the obligation of the depositary under paragraph (2) or of a third party as referred to in paragraph (4)(c) or (5)(c) is not affected by any delegation by the depositary or sub-delegation by the third party of the functions referred to in Article 21.8 of the directive.