The New Black?

  1. Much has been written about how ETFs have started to converge with their actively managed counterparts from the perspective of investment management. But as exchange-traded funds move into ever newer and more complex areas of the asset markets, a parallel shift is taking place in the middle- and back-office functions that are essential in ensuring the smooth and secure operation of a fund. As a result, the role of ETFs’ custodians and administrators is attracting more and more attention.

    However, the safekeeping function for Europe’s collective investment schemes is under the spotlight for other, less welcome reasons too.

    Lehman Brothers’ 2008 failure and, in particular, the Madoff fraud of later that year led to losses at several UCITS-compliant European funds (UCITS are the Europe-wide rules regulating collective investment schemes, including almost all European ETFs). Though no ETFs were affected by Madoff, investors in other funds have sued their custodians for a perceived lack of oversight.

    And while some custodians have written cheques to reimburse those affected, other cases are tied up in legal wrangling over the precise scale of legal responsibilities, with the large number of entities involved in a fund’s operation not helping to clarify things.

    As Olivier Sciales of Luxembourg-based law firm Chevalier & Sciales wrote last year, following the uncovering of Madoff’s fraud, “a fund requires the services of a large number of actors (the board of directors of the funds, the promoter, the depositary, the central administration agent, the auditor, etc.) and it is unclear how far in the hierarchy the (potential) liability shall extend.”

    Europe’s regulators are also now heavily involved in this area of the financial market. The European Commission stated in a May 2010 feedback statement to its 2009 consultation paper on the role of a UCITS depositary that “there is a critical need to clarify depositary duties. UCITS legislation was adopted in 1985 and depositary rules have remained mostly unchanged since then. However, circumstances have changed – assets eligible for inclusion in the UCITS portfolio are increasing in number and complexity. In addition, the management of a company’s activities now extends cross border.” More EU legislation on the depositary function is due in the next year, industry experts say.

    The terms “depositary”, “custodian”, “trustee” and “administrator” are often used interchangeably (and rather loosely) to describe the middle- and back-office functions of a collective investment scheme. The resulting confusion regarding terminology reflects, in part, the different legal structure that a UCITS-compliant collective investment scheme may follow. In Europe, UCITS can be constituted under the law of contract (as common funds), trust law (as trusts) and also under statute; that is, in corporate form (as investment companies).

    According to Karen Bowie, company secretary of DATA, the UK’s Depositary and Trustee Association, an industry body, the functions of “depositary” and “trustee” are essentially the same, although the latter is used only in the case of pooled funds structured as trusts. The custodianship of fund assets is one of the depositary’s key functions, while the fund administrator role is in principle entirely separate, representing a subset of activities that the fund manager is responsible for and which are delegated to a specialist administrator. Confusingly, however, the two key roles in a UCITS’ operation (custodian and administrator) are often performed by the same financial institution, albeit by different legal entities within that firm.

    Tony O’Brien, business development manager at BNY Mellon in Dublin, explained the differences between the key roles involved in the safe-keeping of assets.

    “A UCITS fund requires an administrator to calculate its net asset value and to act as a registrar or transfer agent, the entity that deals with shareholders coming into and out of the fund. In addition, there’s the fiduciary role of a trustee, who represents the interests of the shareholders. Then there’s the custodian, which is responsible for holding the assets of the fund via a network of subcustodians.”

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.