Is our business static? Absolutely not. In fact, it’s in a perpetual state of flux. This dynamism arises from two primary sources: the continual influx of new subjects into the depositary sphere, ranging from novel asset classes to freshly minted regulations--think of the recent SFDR as a prime example. Secondly, the regulator consistently challenges us to refine and adapt our practices, ensuring they remain aligned with evolving standards and expectations.
This aspect merits closer examination because the regulator communicates its requirements through various channels. Naturally, there are new regulatory texts and directives shaping the landscape of depositaries, with a noticeable uptick in publications over the past couple of years.
Another avenue is through onsite inspections, where findings are meticulously documented, analysed and summarised in a structured manner in the CSSF’s annual report. This dedicated chapter serves as a direct message from the CSSF to the market, The insights gleaned from onsite inspections are a mine of information for supervised entities. We share select conclusions from these inspections within the ABBL’s Depositary Banking Cluster (DBCL), allowing us to track the evolving expectations of our national regulatory authority.
Moreover, ad hoc dialogues between industry representatives and regulators are pivotal. Here, both the DBCL and the Depositary Bank Forum play crucial roles, actively contributing to the formulation of market guidelines. This collaborative effort is evident in their participation in consultations on significant guidelines that have shaped the sector in the past decade. The ABBL further facilitates communication between regulators and the industry, operating at both national and European levels. Whether advising on local standards during the drawing up or revision of CSSF circulars or responding to consultations on legislative texts at the European Banking Federation level, the ABBL serves as a vital link in this regulatory ecosystem.
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Another pivotal phase arises during implementation when standards come into effect. Here, the DBCL aims to foster a regular forum with the CSSF to discuss the application of these standards. We also do so on an ad hoc basis when necessary, offering clarifications to benefit our members. Over the last years, we took the initiative to address the CSSF expectations towards depositaries relating to the ‘know your assets’ concept in the AML/CFT field. There was also a need to provide clarity on the expectations regarding depositaries’ production of fund financial year-end bank confirmations for their auditors. Recognising a gap in expectations, we proactively engaged the CSSF, which responded by issuing a circular letter to provide guidance on the matter.
In an industry where best practices are continually evolving, what challenges do players face?
First, oversight hinges on grappling with technical intricacies. Depositary banking remains a domain where expert judgment is paramount. Our teams constantly evaluate the efficacy of existing systems while navigating the complexities of our evolving landscape. Thus, our initial challenge lies in attracting, training, and retaining top-tier expertise.
The second challenge revolves around ensuring a level playing field. This entails fostering uniform understanding among players in Luxembourg regarding CSSF requirements. Moreover, at the European level, divergent interpretations of community standards pose risks to investors and could distort competition between financial centre alike. Here, for example, the ongoing debate between the reliance model and the re-performance model when it comes to oversight duties underscores the need for alignment.
“Not all of our tasks can be automated, as our business still relies on the judgement of experts”
Yet, if there were one overarching challenge, it would be sustaining a profitable and viable business. This task is compounded by considerations of scalability, constrained by inherent limitations. Not all of our tasks can be automated, as our business still relies on the judgement of experts. Not all of them can be outsourced either, because regulations place limits on this. And finally, they cannot necessary all be pooled within asset servicing Groups in the name of the sacrosanct principle of depositary independence. Thus, navigating these multifaceted challenges requires a delicate balance and strategic foresight.
Eric Guerrier is vice chair of Luxembourg Bankers’ Association (ABBL) Depositary Banking Cluster and head of UCI depositary duties at Bank Pictet & Cie (Europe) AG, Succursale de Luxembourg. The ABBL’s “Depositary Banking & Custodian Services Survey 2023” can be found .