Issue link: https://maltatoday.uberflip.com/i/1289033
17.09.2020 NEWS The case for the introduction of an EU Depositary passport THE passporting regime brings along the right to provide financial servic- es in other EU and/or EEA Member States without the need of establishing a registered office or a branch therein. e freedom of movement of servic- es, being one of the four fundamental freedoms of the European Single Mar- ket, underpinned the achievements in building the Capital Market Union. e passporting regime has proven to be beneficial for both asset managers as well as the underlying investors of investment funds. Whilst the primary legislation governing investment funds and relevant service providers ensures a smooth cross-border operation of as- set managers, it remains consistent in prohibiting depositaries from benefit- ing from the internal market through a framework for passporting. Paradoxically, whilst credit institu- tions and investment firms are allowed to offer custody and depositary ser- vices under several EU Directives, the legislation is misaligned in terms of al- lowing for an internal market passport for depositaries servicing investment funds, as the latter is prohibited. In view of the political-economic achievements within the EU asset man- agement industry, the introduction of depositary passporting is seen as a log- ical step to achieve a complete inter- nal market for the asset management industry. To achieve this result, the solution is not one where an even high- er degree of harmonisation (the single rulebook mechanism) is required. Rather, it lies in reflexive governance of financial supervision combined with a framework for the strengthen- ing of mutual trust between national financial supervisors or, alternatively, a centralised approach to supervision by extending the remit of the single su- pervisory mechanism. From a financial stability point of view, the establishment of the depos- itary passporting regime would fairly limit the concentration and the sys- temic risks at a domestic level. Indeed, the issue of concentration risk is seen in small jurisdictions where problems of scale make it less attractive for new and notably large depositaries to oper- ate in these countries. is, in turn, leads to concentration risk where the domestic depositaries become dominant by virtue of their size and accordingly, they would be- come a threat to financial stability. Against this backdrop, based on assets under depositary ("AuD") figures as at 31 December 2018 in Malta, a signif- icant percentage of total AIF/UCITs AuD is concentrated with three de- positaries and this high concentration of AuD is understandably a cause for regulatory concern. From an investment fund and inves- tor viewpoint, the depositary passport will bring more competition in the de- positary field and more choice of ser- vice providers for investment funds and investors possibly leading to a re- duction in counterparty risks as well as lower depositary costs. Depositary passporting would en- sure that the internal market could be- come more integrated and competitive vis-à-vis global competitors. Bearing in mind the need to safeguard inves- tors' protection and financial stability, there is a case for the passport to be given exclusively to credit institutions and investment firms which may act as depositaries of investment funds. Ultimately, both the credit institutions as well as investment firms, are already subject to relevant passporting regimes under other EU legislation. e current prohibition of depositary passporting does not relate to the lack of regulato- ry assurance in the case of provision of services on a cross-border basis, but rather the lack of mutual trust between the jurisdictions hindering the internal market and the overall establishment of the Capital Markets Union. Read more on this topic in an academic paper, titled "Establishing an EU internal market for depositaries", written by MFSA Chief Officer Supervision, Christopher P. Buttigieg, Head of Financial Stability, Joseph Agius, and Senior Analyst within the Supervisory ICT Risk and Cybersecurity function, Sandra Saliba which was published in The Journal of Financial Regulation and Compliance. From a financial stability point of view, the establishment of the depositary passporting regime would fairly limit the concentration and the systemic risks at a domestic level