AIFM directive changes relationships for prime brokers

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While hedge funds and their prime brokers have always managed their custody needs between themselves, under the alternative investment fund managers (AIFM) directive they will have a new member entering the family, a depository bank, a service that custodians will offer.

The AIFM directive’s ‘level 2’ provisions mean that the depository bank will be legally liable for the fund’s assets. This strict legal liability comes in the wake of systemic failures such as Lehman and major frauds such as Mado