Luxembourg is a premier destination for investment funds, known for its strong regulatory framework and investor-friendly environment. One of the critical components in establishing a Luxembourg investment fund is the appointment of a depositary bank. The role of the depositary bank goes beyond simple asset safekeeping; it ensures regulatory compliance and acts as a safeguard against potential risks. However, in recent years, many depositary banks in Luxembourg have become increasingly cautious about accepting new investment funds. Understanding when a depositary bank is required and why it can be challenging to secure one is crucial for fund initiators.
When is a Depositary Bank Required?
The appointment of a depositary bank is mandated by Luxembourg law for several types of investment funds. The requirement is determined by the regulatory structure of the fund and the type of investors it targets.
- UCITS (Undertakings for Collective Investment in Transferable Securities): UCITS funds are highly regulated collective investment vehicles that are typically offered to retail investors. These funds must appoint a depositary bank as a requirement under the UCITS Directive. The depositary bank plays a critical role in safeguarding the fund’s assets and ensuring compliance with EU-wide regulatory standards.
- AIFs (Alternative Investment Funds): AIFs are often used for more complex, non-traditional investment strategies and target professional investors. Under the AIFMD (Alternative Investment Fund Managers Directive), all AIFs managed by an AIFM must appoint a depositary bank. The depositary’s role includes safekeeping assets, ensuring the proper handling of cash flows, and verifying that the fund adheres to its legal and operational obligations.
- RAIFs (Reserved Alternative Investment Funds) and some other funds like Specialized Investment Funds (SIFs): Although not directly supervised by the Luxembourg financial regulator, RAIFs must comply with AIFMD regulations. Therefore, the appointment of a depositary bank is mandatory, even for these lightly regulated funds.
Challenges in securing a depositary bank in Luxembourg
While Luxembourg hosts numerous reputable depositary banks, many are increasingly selective when it comes to taking on new investment fund clients. This reluctance stems from the need for depositary institutions to fully understand the fund’s business model, the nature of the underlying assets, and the associated risks.
- Risk Assessment: Deposit banks face stringent regulatory obligations. They are required to ensure that they do not expose themselves or the fund’s investors to undue risk. As a result, banks conduct a detailed assessment of potential clients to determine if their investment strategy aligns with the bank’s risk tolerance. This means that funds with complex or non-traditional strategies may find it more difficult to secure a depositary.
- Client Transparency: For many depositary banks, understanding the structure, governance, and operational processes of a new fund is essential. Banks often require a deep dive into a potential client’s operations to ensure full transparency and compliance with anti-money laundering (AML) and know-your-client (KYC) regulations. In cases where a fund’s operations are not clearly defined or fully understood, banks may hesitate to take on the client.
- Capacity and Specialization: Some depositary banks are specialized in certain types of funds, such as UCITS, and may not have the internal resources or expertise to manage more complex AIFs or RAIFs. In such cases, even if a fund meets regulatory standards, it may not align with the bank’s strategic priorities, further limiting the pool of potential depositaries.
Damalion: Your Trusted Partner in Luxembourg
At Damalion, we understand the challenges that fund initiators face when seeking to appoint a depositary bank. With the increasing reluctance of many banks to take on new clients, our company can help facilitate introductions to selected banking partners that are open to working with new funds.
Our extensive network of depositary banks in Luxembourg ensures that we can identify institutions that not only meet regulatory requirements but are also aligned with your fund’s investment strategy. Whether you are launching a UCITS, AIF, SIF, or RAIF, we provide tailored introductions to depositary banks with the right expertise and risk appetite for your specific fund structure.
By partnering with Damalion, you can overcome the challenges of securing a depositary bank and focus on growing your investment fund with confidence, knowing that your assets are in trusted hands. Please contact your Damalion expert now.
