(‘the Circular’) was published by the Commission de Surveillance du Secteur Financier (CSSF) in May 2022 with the purpose of specifying principles of good governance and internal organization for undertakings for collective investment (UCI) administrators of regulated and non-regulated entities established or not in Luxembourg. The Circular replaces Chapter D of IML 91/75 wherein UCIs were previously limited to UCITS and Part II funds.
Three considerations for asset servicers
1. All Management Companies, Alternative Investment Fund Managers (AIFMs), foreign Investment Fund Managers, Regulated Luxembourg UCIs and Credit Institutions wishing to administer UCIs moving forward must obtain prior authorization from the CSSF.
2. From 30 June 2023, UCI administrators must report on their business activities annually to the CSSF at the latest five months after their financial year-end.
3. The three main administrative functions – registrar, NAV calculation and accounting, and client communication – and their requirements are spelt out. It is clarified that tasks relating to monitoring or due diligence/oversight of delegates cannot be delegated.
A glance at some key themes
Appropriate substance and resources – The UCI administrator must have substance and resources proportionate and adapted to the business. The number of staff should be sufficient to serve the volume and complexity of UCIs administered and to ensure the four-eyes (maker/checker) principle is always applied.
IT systems – UCI administrators are recommended to comply with the principles of Circular 20/750 on ICT and security risk management. In addition, and except when the volume and complexity of UCI administered is low, a dedicated professional software must be used to calculate NAVs and entities shall have not only the necessary technical resources to manage but also appropriate set of technical procedures. In alignment with Circular 22/806 on Outsourcing Arrangements, for systems based outside of Luxembourg, entities must ensure a secure backup of all accounting and registrar positions is available in the European Economic Area (EEA) at the end of each NAV calculation day.
Documentation – The Circular requires multiple – sometimes physical – documents to be created and reviewed annually. These include business contracts between the UCI administrator, the UCI and delegates, a manual of written procedures covering administration functions, and record-keeping of information flows between the UCI administrator and depositary.
Scale up to ensure compliance?
The ‘UCI administrator’ Circular applies with immediate effect. UCI administrators already existing as at 16 May 2022 have until 30 June 2023 to comply. It is a critical time for asset servicers to consider where they stand and what actions should be taken.
Teaming up with the right partner is key in this process. At EY, we have a dedicated asset servicing sector focus which offers a broad selection of consulting and assurance services to support asset servicers – Credit Institutions, PSFs, third party management companies and AIFMs. There are a number of steps that can be taken to ensure compliance. We suggest the following.
To gauge the current level of compliance, asset servicers should consider undertaking a gap analysis on work and contractual documentation, delegation frameworks and controls, and manuals dedicated to administration activities.
Second, getting an external certification through the issuance of an ISAE 3402 Report from an independent auditor, which can bring comfort to both asset servicers and their clients on the compliance of internal controls and which has now became a must-have tool for Asset Servicers.
Third, special attention should be paid to the continuity of services, and every UCI administrator should establish, if not done so already, a business continuity management process to aid operational resilience and limit losses in the event of any disruption or disaster.
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