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Emerging markets funds may face EU restrictions

The IMA and NAPF have warned that European Commission proposals could lead to heavy restrictions on investing in emerging market funds.

Experts say the alternative investment funds management directive would mean depositories used by fund firms will become “guilty until proven innocent” in terms of investor liability if assets become unaccounted for.

The directive affects all non-Ucits firms but EU Commissioner Charlie McCreevy wants protection levels extended to cover Ucits funds.

Emerging market funds would be severely affected due to using sub-custodians outside the EU. For example, some non-EU countries such as Russia require securities issued in their own country to be held by a local depository. The fund firm’s main global depository would still be responsible for any losses.

IMA director for international relations Jarkko Syyrila says: “This could be the end of the story for a number of emerging markets funds, whether they are Ucits or not. If the legislation goes through as it is, I think there would be massive concerns for all fund groups and I would expect a number of funds to close as a number of depositories will not take on those risks or will only do so for a significantly higher price.”

Citibank head of UK fiduciary services David Morrison says: “The AIFM rules mean depositories are now guilty until proven innocent as an inversion of the burden of proof.”

NAPF policy adviser for European regulation Julian Le Fanu says: “It will make emerging markets funds difficult to operate, particularly those that do not sit under the Ucits banner, where the effects are likely to be harsher.”

The EC has postponed any decisions on the directive depository rules until the completion of the current Ucits review.

AIC public affairs director Guy Rainbird says: “As a credit institution can only delegate to another in the EU, it means you cannot go into places like China and Japan and if you could, the liabilities are likely to be heavy. The universe of those wanting to take on the risks will get smaller.”

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