Circular No. 04/CREPMF/2022 on the Custodian Contract and Duties

UNION MONETAIRE OUEST AFRICAINE crepmf CONSEIL REGIONAL DE L'EPARGNE PUBLIQUE ET DES MARCHES FINANCIERS

CIRCULAIRE N°04/CREPMF/2022
RELATIVE AU CONTRAT ET MISSIONS DU DEPOSITAIRE

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The General Secretariat of the Regional Council for Public Savings and Financial Markets (CREPMF) reminds Collective Investment Undertakings (CIUs), CIU Management Companies, Intermediation and Management Companies, and licensed Account-Keeping/Bank Custodians on the regional financial market that they must, in accordance with current regulations and as part of their authorization, permanently comply with the provisions of this Circular, which specifies the details to be included in the Custodian Contract and the obligations of custodians.

For the purposes of this Circular, the term "Instruction" refers to Instruction No. 66/CREPMF/2021 on Collective Investment Undertakings and their Management Companies on the regional financial market of the UMOA.

I- CUSTODIAN CONTRACT

The Custodian Contract is a contract under which the Custodian is appointed, in accordance with Article 20 of the Instruction. It is concluded between, on the one hand, the Custodian and, on the other hand, the CIU Management Company and/or the CIU. It includes at least the following elements:

a) a description of the services to be provided by the Custodian and the procedures to be adopted for each type of asset in which the CIU may invest and which will subsequently be entrusted to the Custodian;

b) a description of how custody and monitoring functions will be exercised, depending on the types of assets and geographical regions in which the CIU plans to invest. Regarding custody functions, the description includes lists of countries and procedures allowing for the addition and, where applicable, the removal of countries from this list. These elements are compatible with information in the CIU's Regulations or constituent documents, and its offering documents regarding investable assets;

c) a declaration stating that the Custodian's liability is not modified in case of delegation of custody functions, unless the Custodian has discharged itself from its liability, in accordance with Article 21 of the Instruction;

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d) the validity period and conditions for modification and termination of the contract, including situations that may lead to contract termination and details of the termination procedure, as well as, where applicable, procedures for the Custodian to transmit all relevant information to its successor;

e) confidentiality obligations applicable to the parties, in accordance with relevant laws and regulations. These obligations do not prevent competent authorities from accessing necessary documents and information;

f) the means and procedures used by the Custodian to transmit to the CIU Management Company or CIU all information they need to fulfill their missions, including the exercise of rights attached to assets, and to enable the CIU Management Company and CIU to have a timely accurate overview of its accounts;

g) the means and procedures used by the CIU Management Company or CIU to transmit to the Custodian all information it needs to fulfill its missions, or ensure that it has access. This includes, among others, procedures ensuring the Custodian receives necessary information from third parties designated by the CIU or CIU Management Company;

h) information indicating whether the Custodian or a third party to whom custody functions are delegated, in accordance with Article 21, may or may not reuse assets entrusted to it, as well as, if applicable, the conditions for such reuse;

i) procedures to be followed when a modification of the CIU's Regulations, constituent documents, or offering documents is envisaged, with a detailed description of situations in which the Custodian must be informed or must give prior consent to the modification;

j) information exchange obligations between, on the one hand, the CIU, CIU Management Company or a third party acting on behalf of either, and, on the other hand, the Custodian, regarding the sale, subscription, redemption, issuance, cancellation and repurchase of CIU shares or units;

k) information exchange obligations between, on the one hand, the CIU, CIU Management Company, a third party acting on behalf of either, and, on the other hand, the Custodian, regarding the exercise of the Custodian's monitoring and control functions;

l) if the contracting parties intend to designate third parties to fulfill part of their respective missions, an undertaking to regularly communicate the contact details of any designated third party and, upon request, the criteria used to select it and measures envisaged to ensure monitoring of its activities;

m) information on the tasks and responsibilities of the contracting parties regarding anti-money laundering (AML) and counter-terrorist financing (CFT) obligations;

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n) information on all liquidity accounts opened in the name of the CIU or in the name of the CIU Management Company acting on behalf of the CIU, and procedures ensuring that the Custodian is informed upon any account opening in the name of the CIU or CIU Management Company acting on behalf of the CIU;

o) details of the Custodian's step-by-step intervention procedures, including the identity of persons working for the CIU Management Company or CIU that the Custodian must contact when initiating such procedures;

p) the Custodian's undertaking to inform the CIU Management Company if it finds that asset segregation is insufficient or no longer sufficient to guarantee protection against the insolvency of a third party on whose territory custody functions are delegated, in accordance with Article 21 of the Instruction.

q) procedures ensuring that the Custodian, regarding its functions, can inquire about how the CIU Management Company or CIU conducts its activities and assess the quality of information obtained, including by a right of access to the accounting books of the CIU or CIU Management Company or through on-site visits;

r) Procedures ensuring that the CIU Management Company or CIU can review the Custodian's results against its contractual obligations.

The means and procedures referred to in points a) to r) above are described in detail in the Custodian appointment contract or its subsequent amendments.

The Custodian appointment contract and the aforementioned subsequent amendments are drawn up in writing.

The parties may agree to transmit electronically all or part of the information they exchange, provided that such information is duly recorded.

II- CUSTODIAN FUNCTIONS, DILIGENCE OBLIGATIONS, SEGREGATION OBLIGATIONS

2.1 Liquidity Monitoring - General Requirements

When a liquidity account is held or opened with an entity referred to in Article 21 of the Instruction in the name of the CIU, the CIU Management Company or the Custodian acting on behalf of the CIU, the CIU Management Company ensures that the Custodian receives from the beginning of its functions and permanently all information necessary to comply with its obligations.

For the Custodian to have access to all information concerning the CIU's liquidity accounts and a clear overview of all CIU liquidity flows, it is informed, at least, of the following:

a) upon its appointment, of the existence of any liquidity accounts opened in the name of the CIU, or in the name of the CIU Management Company acting on behalf of the CIU;

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b) of the opening of any new liquidity account by the CIU or by the CIU Management Company acting on behalf of the CIU;

c) of all data relating to liquidity accounts opened with third-party entities, directly by these entities.

2.2 Monitoring of CIU Liquidity Flows

The Custodian ensures effective and adequate monitoring of the CIU's liquidity flows, notably through the following actions:

a) ensuring that CIU liquidity is accounted for, on relevant markets where liquidity accounts are required for the CIU's operations, in accounts opened with credit institutions of the Union;

b) implementing effective and adequate procedures to reconcile all liquidity movements, at least daily or, if liquidity movements are infrequent, upon each movement;

c) implementing appropriate procedures to detect significant liquidity flows at the close of business, and in particular those that may not correspond to the CIU's activities;

d) periodically reviewing whether these procedures are appropriate, notably by fully re-examining the reconciliation process at least once a year, and ensuring that liquidity accounts opened in the name of the CIU, or in the name of the CIU Management Company acting on behalf of the CIU or the Custodian acting on behalf of the CIU, are integrated into this process;

e) ensuring continuous monitoring of reconciliation results and measures taken when discrepancies are detected under these procedures. It informs the CIU Management Company if an irregularity has not been rectified promptly and also informs the Regional Council if the situation cannot be clarified or rectified;

f) verifying the correspondence of liquidity positions between its own registers and those of the CIU Management Company. The CIU Management Company ensures that all instructions and information related to a liquidity account opened with a third party are transmitted to the Custodian, so that the latter can carry out its own reconciliation procedure.

2.3 Obligations Related to Subscriptions

The CIU Management Company ensures that the Custodian, as part of its controls, receives information regarding payments made by investors or on their behalf during the subscription of CIU shares or units. The CIU Management Company ensures that the Custodian receives all other relevant information it needs to ensure that payments are subsequently accounted for in liquidity accounts opened in the name of the CIU, in the name of the CIU Management Company for the account of the CIU or in the name of the Custodian, in accordance with Article 21 paragraph 1 of the Instruction.

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2.4 Financial Instruments to be Safeguarded

Financial instruments belonging to the CIU or the CIU Management Company acting on behalf of the CIU, which cannot be physically delivered to the Custodian, fall under the Custodian's safeguarding functions when all of the following conditions are met:

a) they are securities, money market instruments or CIU shares;

b) they can be registered or held in an account directly or indirectly in the name of the Custodian.

Financial instruments that are only registered directly in the name of the CIU with the issuer itself or its agent cannot be safeguarded.

Financial instruments belonging to the CIU or the CIU Management Company acting on behalf of the CIU, which can be physically delivered to the Custodian, always fall within the scope of the Custodian's safeguarding functions.

2.5 Safeguarding Obligations for Safeguarded Assets

To comply with the obligations provided in Article 21 paragraph 2 point a) of the Instruction, regarding financial instruments whose safeguarding is ensured, the Custodian ensures, at least, that:

a) financial instruments are correctly registered in accordance with Article 21 paragraph 2 point a) ii), of the Instruction;

b) registers and segregated accounts are maintained in a manner ensuring their accuracy, and in particular their correspondence with financial instruments and liquidity held for the CIU;

c) reconciliations are regularly performed between the Custodian's internal accounts and registers and those of any third parties to whom custody functions have been delegated, in accordance with Article 21 paragraph 5 of the Instruction;

d) due diligence is exercised regarding safeguarded financial instruments, to ensure a high level of investor protection;

e) all relevant safeguarding risks throughout the safeguarding chain are assessed and monitored, and the CIU Management Company is informed of any significant risk detected;

f) appropriate organizational arrangements are put in place to minimize the risk of loss or diminution in value of financial instruments, or rights attached to these instruments, due to fraud, poor management, inadequate registration or negligence;

g) the ownership rights of the CIU or CIU Management Company acting on behalf of the CIU over the assets are verified.

When a Custodian has delegated its safeguarding functions to a third party in accordance with Article 21 paragraph 8 of the Instruction, it remains subject to the provisions of paragraphs b) to e) above. It also ensures that the third party complies with the provisions of points b) to g) above, as well as with the segregation obligations provided in 2.15 of this Circular.

The Custodian's safeguarding obligations, as referred to in paragraphs 1 and 2 above, apply, from a transparency perspective, to underlying assets held by financial or legal structures controlled directly or indirectly by the CIU or by the CIU Management Company acting on behalf of the CIU.

The requirement stated in the first paragraph of this section does not apply to Funds of Funds if the underlying funds have a Custodian that safeguards their assets.

2.6 Safeguarding Obligations Regarding Ownership Verification and Registration

The CIU Management Company provides the Custodian, from the beginning of its functions and permanently, all information necessary for the latter to comply with its obligations under Article 21 paragraph 2 point b) of the Instruction, and ensures that the Custodian receives all useful information from third parties.

To comply with the obligations provided in Article 21 paragraph 2 point b) of the Instruction, the Custodian meets the following conditions:

a) access in the shortest possible time to all relevant information it needs to fulfill its ownership verification and registration obligations, including relevant information that third parties must provide to it;

b) possess sufficient and robust information enabling it to be assured of the ownership rights of the CIU or CIU Management Company acting on behalf of the CIU over the assets;

c) maintain a register of assets it is assured are owned by the CIU or CIU Management Company acting on behalf of the CIU. To satisfy this obligation, the Custodian:

i. records in its register, under the mention of the CIU's name, assets it is assured are owned by the CIU or CIU Management Company acting on behalf of the CIU, with mention of their respective notional amounts;

ii. is able to provide at any time a complete and up-to-date inventory of the CIU's assets, with mention of their respective notional amounts.

For the purpose of point c) ii) above, the Custodian ensures that procedures are in place so that registered assets cannot be assigned, transferred, exchanged or delivered unless it or its delegate has been informed, and that it has access in the shortest possible time, with the concerned third party, to documents proving each transaction and position. The CIU Management Company ensures that the concerned third party provides the Custodian with certificates or other probative documents in the shortest possible time, upon each sale or acquisition of assets or corporate operation resulting in the issuance of financial instruments, and at least once a year.

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In all cases, the Custodian ensures that the CIU Management Company establishes and applies appropriate procedures to verify that the CIU's assets are appropriately registered, and to verify the correspondence between positions in the CIU Management Company's registers and assets of which the custodian is assured are owned by the CIU or the management company acting on behalf of the CIU.

The CIU Management Company ensures that all relevant instructions and information related to the CIU's assets are transmitted to the Custodian, so that the latter can carry out its own verification and reconciliation procedures.

The Custodian establishes and implements a step-by-step intervention procedure to be followed upon detection of an anomaly, which provides in particular for reporting the situation to the CIU Management Company and the Regional Council if it cannot be clarified or rectified.

The Custodian's safeguarding obligations referred to in paragraphs 1 to 4 apply, from a transparency perspective, to underlying assets held by financial or legal structures established to invest in the relevant assets, by the CIU or by the CIU Management Company acting on behalf of the CIU and controlled directly or indirectly by either.

The requirement stated in the first paragraph of this section does not apply to Funds of Funds if the underlying funds have a Custodian that exercises ownership verification and registration functions for their assets.

2.7 Reporting Obligations for Prime Brokers

When a prime broker has been designated, the CIU Management Company ensures that, from the date of designation, a contract is put in place under which the prime broker must make available to the Custodian, notably a statement on durable medium containing the following information:

a) the value of the different items listed in point 2.3 at the close of each business day;

b) any other detailed information necessary for the CIU's Custodian to have exact and updated knowledge of the value of assets whose custody has been delegated, in accordance with Article 21 paragraph 5 of the Instruction.

The statement referred to in paragraph 1 of this section is made available to the CIU's Custodian, at the latest by the close of business on the day following that to which it relates.

The items referred to in paragraph 1, point a) of this section are as follows:

a) the total value of assets held by the prime broker for the CIU, when custody functions are delegated in accordance with Article 21 paragraph 5 of the Instruction. This total value concerns the value of each of the following items:

i. cash loans granted to the CIU and accrued interest,

ii. securities that must be delivered by the CIU under short positions opened on its behalf,

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iii. current amounts to be paid by the CIU under standardized forward contracts,

iv. cash proceeds from short sales held by the prime broker in relation to short positions taken on behalf of the CIU,

v. cash margins held by the prime broker in relation to standardized forward contracts opened on behalf of the CIU. This obligation is in addition to those arising from sections 2.4 and 2.5 of this Circular,

vi. market value exposures at the close for any over-the-counter transaction conducted on behalf of the CIU,

vii. the total secured obligations of the CIU vis-à-vis the prime broker, and

viii. all other assets related to the CIU;

b) the value of other assets referred to in Article 21 paragraph 2 point b), of the Instruction and held as collateral by the prime broker in relation to secured transactions concluded under a prime brokerage contract;

c) the value of assets for which the prime broker has exercised a right to use the CIU's assets;

d) an exhaustive list of establishments with which the prime broker holds or may hold CIU liquidity in an account opened in the name of the CIU or in the name of the CIU Management Company acting on behalf of the CIU in accordance with Article 21 paragraph 1 of the Instruction.

2.8 Monitoring Obligations - General Requirements

Upon its appointment, the Custodian evaluates risks related to the nature, size and complexity of the CIU's strategy and the organization of the CIU Management Company, in order to design appropriate monitoring procedures for the CIU and the assets in which it invests, which are then implemented and applied. These procedures are regularly updated.

In exercising its monitoring obligations under Article 21 paragraph 3 of the Instruction, the Custodian performs ex-post controls and verifications on processes and procedures falling under the responsibility of the CIU Management Company, the CIU or a designated third party. The Custodian ensures the existence