19/01/2011 Author: Tony Griffiths

PBs unlikely to fill despository role

Most prime brokers are unlikely to want to become a depository, despite new EU regulations affording them the opportunity to do so, senior industry figures have told HFMWeek.   

The depository section in the Alternative Investment Fund Manager Directive (AIFMD) – ratified by the EU Parliament in November – has opened the door to the possibility of a single entity performing the role of both prime broker and depository, as long as “it has functionally and hierarchically separated the performance” of the two.

However, under AIFMD, the liability attributed to a depository is increased, as are capitalisation requirements, while the types of firms that can become depositories have been decreased. Although yet to be clarified in itself, the definition of a depository is widely held as a company, usually a bank, which holds funds or securities deposited by others, and in which exchanges of these securities take place. 

“The feedback we’ve had, although by no means final, is that most prime brokers probably won’t want to step into the role of depository,” said Martin Cornish, senior partner at London-based Katten Law.

“Certainly, the custody space is going to expand because there are many more vehicles now that will require a fully-fledged depository [as a result of AIFMD],” said Sheenagh Gordon-Hart, client and industry research executive for worldwide securities services at JP Morgan. “But risk is an issue and that will work against some smaller players being able to compete in the space.”

Among those exploring the possibility of strengthening the relationship between prime brokerage and depository is Deutsche Bank. According to Anthony Byrne, co-head of European prime brokerage, most prime brokers are doing likewise, but it was “unlikely” that a significant number would take the plunge.

Byrne, however, said Deutsche Bank will likely end up offering an “open architecture model”, allowing hedge fund managers the choice of an integrated prime-depository model or separate entities. “That’s the model that the industry is likely to follow,” he said.  

The EU, led by Esma, is currently undertaking a consultation process with the industry – including input from the likes of Deutsche’s Byrne – to discuss the implementation of AIFMD, which is scheduled to become law in early 2013