An overview of Depositary Services

One of the requirements of the Alternative Investment Fund Managers Directive (‘AIFMD’), effective since 22 July 2013, is for alternative investment fund managers (‘AIFMs’) to appoint an independent depositary. AIFMD-compliant depositaries have a much broader set of responsibilities compared to traditional custodians, whose role is largely limited to the safekeeping of assets.  The Directive highlights two additional duties, which considerably enhance the importance of a depositary: cash monitoring and certain oversight activities.

In Malta, similarly to other countries such as the UK or Luxembourg, depositaries are regulated by the local regulator such as the MFSA. Providing depositary services is subject to prescribed rules and the key individuals involved in this work are required to go through the MFSA screening process.

Who can be a depositary?

The Directive allows non-banking entities to act as depositary for alternative funds, as long as they have an initial lock-up period of five years regarding redemptions, and invest mainly in non-financial assets. This was welcome news to the alternative investment funds industry, as it meant more choice of providers and fee reductions due to strong competition for the depositary business.

Professional depositaries have emerged from corporate and fund administration service providers and are a popular choice among fund managers, as they have strong knowledge of the alternative investment industry and can provide a more tailored service. Traditional banks remain focused on UCITS and hedge funds investing mainly in financial assets, although several larger players are also actively targeting the real estate and private equity depositary business.

The controversy

One of the more controversial subjects surrounding depositaries concerns the added value that a depositary will convey to an alternative investment fund and its investors. In certain countries promoters ensure that they appoint depositaries with well-known names to market their Alternative Investment Funds (‘AIFs’) to attract high profile investors like insurance companies, pension funds or employee schemes, which believe that this service brings an additional level of protection to their investments. Whereas elsewhere, many real estate and private equity houses consider  the introduction of a depositary to be an additional cost that will not procure any additional protection to the investments or investors. 

Those recalling the Madoff affair will probably lean towards the more secure approach and will seek to have an additional layer of independent and regulated controls over their investments and their day-to-day management.

In order to reinforce the protection of investors, and in addition to safekeeping and cash monitoring duties, the AIFMD also introduced the requirement of oversight such as regular checks and controls on the subscription/redemption processes, distributions, valuations in the preparation of the NAV. If the AIF does not operate within the remit of its offering document and consequently, for example, one of the investors suffers damages, they can pursue a claim against the fund manager and also the depositary.


Structures of alternative investment funds are often complex and the ownership of assets is normally established by looking through the chain of ownership of several investment vehicles often based in various jurisdictions. Therefore, many alternative asset managers prefer to select a firm that is experienced in the real estate and private equity industry to act as a depositary. 

A large number of alternative funds have not yet been captured by the requirement to appoint a depositary due to their offshore arrangements - particularly popular in the private equity and real estate world and less so in debt. 

Non-EU AIFMs, for example those based in Guernsey, marketing EU AIFs to professional investors take advantage of “private placement rules” and are not subject to any of the depositary requirements, unless they market to countries with strict laws such as Germany. 

It is likely that private placement regime will be gradually phased out sometime in the future so the exemption from the depositary requirement may not be available anymore, but it is uncertain when this would happen.

Przemyslaw Koger
Head of Depositary Services Malta - Alter Domus