Central Bank of Ireland's Guidance for Real Asset Depositaries

In February 2021 the Central Bank published a Guidance Note on the authorisation requirements for a new type of depositary that is focused on the safe keeping of real assets (Real Asset Depositary), (sometimes referred to as “Depositary of Assets other than Financial Instruments”). In this article we identify the key requirements that apply to a Real Asset Depositary.

Types of funds

A Real Asset Depositary may only act for certain types of alternative investment funds (AIFs) that are established as closed-ended funds with no rights of redemption during the first five years of their launch.

In addition, the closed-ended fund does not generally invest in financial instruments that must be held in custody pursuant to Regulation 22(8)(a) of the European Union (Alternative Investment Fund Managers) Regulations, 2013 (the "AIFMD Regulations") (the General Custody Rule). Where an AIF proposes to invest in financial instruments that are held in custody and therefore are subject to the General Custody Rule, the Central Bank of Ireland (the Central Bank) expects a Real Asset Depositary will delegate the custody of those financial instruments to a sub-depositary, or alternatively, will hold additional capital to cover risk of loss of those investments.

The types of AIFs that a Real Asset Depositary will typically be appointed to are qualifying investor alternative investment funds (“QIAIFs”)[1] established as real estate funds, private equity funds and infrastructure funds.

Types of investments

The Central Bank has advised that it does not propose to establish a list of the types of investments (not being financial instruments) that a Real Asset Depositary may act as depositary, nonetheless examples of the eligible types of investments that a Real Asset Depositary may service is specified in the Central Bank’s AIFMD Q&A (ID 1139), which includes land, real estate, private companies, infrastructure, trade claims to name a few.

Eligible firms

A firm may be authorised as a Real Asset Depositary if it satisfies the following conditions:

1. It is incorporated in Ireland and is authorised to carry out custodial operations under the Investment Intermediaries Act 1995, as amended

2. It satisfies the Central Bank with regard to the following requirements:

   • It has appropriate expertise and experience to carry out the role of a Real Asset Depositary

   • It dedicates sufficient resources and adequate internal governance and internal organisation controls

   • It maintains a capital requirement of the greater of (i) €125,000, or (ii) one quarter of the firm’s total expenditure requirement

   • It has at least two Irish resident directors

3. It complies with the safekeeping and oversight obligations of depositaries under the AIFMD Regulations

4. It complies with Chapter 5 of the Central Bank’s AIF Rulebook, which sets out requirements around:

   • Reporting

   • Business continuity planning

   • The obligation to report annually to unitholders on the management of the relevant alternative investment fund manager (AIFM), and

   • Reporting breaches to the Central Bank

5. It has professional indemnity insurance to cover loss that may be caused by the negligent performance of its obligations. The level of cover depends on the value of portfolios of the QIAIFs to which the Real Asset Depositary has been appointed to. The adequacy of cover should be reviewed at least once a year by the Real Asset Depositary

Asset verification duties

The Real Asset Depositary must satisfy the Central Bank of its capacity to safe-keep and provide ongoing monitoring of the assets for which it provides services. The Central Bank will consider the extent to which the Real Asset Depositary has appropriate controls, policies and procedures to ensure that:

• The AIF has a clear title of ownership to the assets that is properly registered and documented

• The AIF’s ownership of the assets can be verified and confirmed on an ongoing basis

• The assets are safeguarded in order to preserve them, and

• Risks to safeguarding of assets are identified, managed, monitored and mitigated

Prospectus disclosure

The status, and the limited nature of the activities and related liability, of Real Asset Depositaries will need to be disclosed in the prospectus of the relevant QIAIF.

How we can help

We have extensive experience in advising firms on the authorisation requirements of the Central Bank. If you would like to discuss any queries relating to the formation of a Real Asset Depositary or the operating requirements that apply to a Real Asset Depositary, please contact a member of our Investment Funds team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.