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Depositary - additional protection for investors

All investment funds established in Lithuania (or in any country of the European Union) and operating under the laws of the Alternative Investment Fund Managers Directive (AIFMD) or Undertakings for Collective Investment in Transferable Securities (UCITS), as well as pension funds, must appoint a depositary. Such an obligation for the manager of investment funds arises when the assets under management reach EUR 100 million. But in most cases, the investor does not know what the depositary does and why it‘s needed. In this review, Jolita Jonaitienė, Head of Depositary at “Orion”, explains the depositary functions and responsibilities.

Jolita Jonaitienė | „Orion“ Head of Depositary

Depositary operates for the benefit and interests of the fund’s participants

The essential function of the depositary is to protect fund investors’ investments and their interests and to ensure that the fund manager acts fairly towards all fund investors. Depositary functions and services include:
– Safekeeping/control of financial instruments;
– Ownership Verification and record keeping;
– Ensuring the fair value of net assets;
– Transaction monitoring;
– Oversight duties;
– Control over the issue and redemption of units/shares;
– Cash flow monitoring.

Safekeeping/control of financial instruments

The law mandates that all assets of the fund must be safekept/controlled or the right of ownership is verified by a single depositary. Safekeeping of financial instruments is one of the crucial functions of the depositary as it is the most fundamental element of investor protection. Safekeeping includes verifying ownership, correct registration, records management, regular coordination, and monitoring and assessment of safekeeping.

The fund’s financial instruments are always kept in a segregated depositary‘s account making it easy to determine the assets of that specific fund at any given time. In cases when the fund acquires other assets, for instance, real estate, the depositary follows the required procedures for verifying the ownership and record keeping. This means that the depositary is verifying the ownership of such assets, and only then registers it in the name of the fund. Fund’s assets list is regularly updated and verified. Usually, external data registers, such as the State Enterprise Centre of Registers, are used to authenticate ownership.

Oversight duties

As operating for the benefit and interests of the fund’s participants, the depositary monitors the fund’s transactions and ensures compliance with the investment restrictions outlined in the rules and legal acts. Ex-ante and/or ex post control measures are used to implement this function. Ex ante control may be applied when the property is acquired under a pre-contract. For example, if the fund invests in commercial real estate according to the rules, then the depositary checks whether the newly purchased investment is specifically in real estate of such purpose. If the rules stipulate that the fund can invest only a certain percentage of its assets in this type of asset (for example, 30%), the depositary, before executing the transaction, assesses whether this will not violate the fund’s rules or restrictions of legal acts.

Ex post control measures are more often applied when, for instance, the fund carries out active trading of financial instruments. Then, with the expected regularity the depositary reviews the executed transactions and evaluates their compliance with the investment strategy set in the foundation documents of the fund and the applicable diversification restrictions.

The correct value of investment units – peace of mind for the investor

The depositary plays a significant role in ensuring the correct value of investment units by verifying that the net asset value (NAV) of the fund provided by the management company is calculated by the applicable accounting standards, legal acts, and fund’s rules. The depositary acts as an independent verifier each time NAV is calculated and ensures that the value is correct. If any errors are identified, the depositary ensures that they are corrected before announcing the NAV to investors, providing them with peace of mind that the presented value of the investment unit reflects the real situation of the fund and is accurate.

Another essential function of the depositary is its control over the issue and redemption of the investment units of the fund. The depositary ensures that the issue, redemption, or cancellation of investment units is carried out by the foundation documents and applicable legal acts. The depositary checks whether the number of fund units assigned to the investor is correct based on the submitted application and the transferred amount of money. In the case of redemption of units, it ensures that the correct amount of money has been transferred on time to the investor of the fund who submitted the redemption application. The depositary also regularly checks whether the total number of units in the fund’s accounts matches the total number of investment units in circulation recorded in the fund’s register.

Control over the disposition of the fund‘s assets

In the addition to supervisory functions already listed, the depositary performs the maintenance of the fund‘s cash accounts where the fund assets are safekept. Usually, the depositary has a mechanism of control for such accounts, which practically prevents the management company from disposition of these assets without the depositary’s consent or approval. When carrying out instructions of the management company, it is always taken into account whether they comply with applicable laws and regulations and the fund’s rules.
In order to detect any discrepancies in the fund account on time, the depositary is constantly monitoring changes in cash flows to assess whether all transactions are in line and whether all income is used under the requirements of the fund’s rules and legal acts. When the transactions take place, the depositary supervises that each fund’s amount is transferred to the fund account and that it is done on time.

“Orion Securities” is a licensed brokerage firm that is supervised by the Bank of Lithuania and provides depositary services to the funds operating under AIFMD and UCITS. The depositary team consists of professionals in the fields of finance, investment funds, and depositary, with many years of experience in the largest banks in the country.

Related articles:

What is the difference between a custodian and a depositary?

Jolita Jonaitienė
Orion Securities | Head of depositary

We consult:

– All depositary related issues

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Marius Mykolaitis | Head of corporate clients