Fund Management Self-Custody: A Thematic Review

The Riffle

The Dubai Financial Services Authority (DFSA) has published the findings of its Thematic Review on self-custody arrangements by Fund Managers (FMs) of Domestic Funds in the DIFC. The review was triggered by the sharp growth of the Domestic Funds market, which rose nearly 20% to 153 funds between December 2023 and June 2024.

Notably, 46 funds (30% of the total)—managing USD 3.8 billion, or 45.5% of Domestic Fund AuM—operate under self-custody arrangements .

While some FMs voluntarily applied higher Public Fund standards, the review identified widespread weaknesses in risk management, disclosures, and compliance oversight.

Key Findings

1. Operational Risk

• Expectation: FMs must have comprehensive written self-custody policies.

• Good practice: Maintaining custody registers, detailed operations manuals.

• Weaknesses: Most lacked written policies, failed to update them, or had unclear asset ownership structures.

• Action required: Review adequacy of policies to reflect current arrangements and business scale 

2. Conflicts of Interest

• Expectation: Custody functions should be independent from fund management.

• Good practice: Committee-level conflict reviews, disclosures in compliance manuals, segregation of duties.

• Weaknesses: Conflicts not addressed in policies; poor or missing disclosures in offering documents.

• Action required: Strengthen conflict management and ensure proper disclosures to unitholders 

3. Transparency & Disclosure

• Expectation: Clear disclosures on self-custody in PPMs, prospectuses, and periodic reports.

• Weaknesses: Several FMs failed to disclose self-custody practices to unitholders.

• Action required: Ensure consistent and transparent disclosure across all investor communications .

4. Liquidity Risk

• Expectation: Open-ended funds must maintain robust liquidity management systems.

• Weaknesses: One FM lacked adequate systems for its open-ended fund.

• Action required: Implement proper liquidity risk controls for open-ended funds .

5. Oversight & Risk Mitigation

• Expectation: Compliance officers must monitor self-custody through the Compliance Monitoring Programme, oversight committees, or internal audits.

• Weaknesses: Some CMPs excluded self-custody; compliance reports lacked detail; no internal audit reviews conducted.

• Action required: Enhance oversight and subject self-custody to rigorous compliance and audit scrutiny .

Conclusion

The DFSA’s thematic review underscores the need for stronger governance, transparency, and compliance in self-custody arrangements. While some good practices exist, many Fund Managers fall short of expected standards.

The regulator expects all FMs to review their policies, disclosures, and oversight frameworks, and be prepared to demonstrate corrective action in future supervisory engagements.

This review serves as a clear reminder: as the DIFC fund industry grows, robust self-custody practices are essential to safeguarding investor interests and maintaining regulatory confidence.

Read the Full Briefing Document Presented by 10 Leaves here -