IOSCO has published its final report on standards for the custody of collective investment schemes’ assets (CIS assets). It seeks to clarify, modernise and further develop standards for the custody of CIS assets consistent with IOSCO Principles. It sets out eight standards in two sections aimed at identifying the core issues that should be kept under review by the regulatory framework to ensure investors’ assets are effectively protected. The first four focus on key aspects relating to the custody function whilst the latter four relate more to the appointment and monitoring of custodians:

  • the regulatory regime should make appropriate provision for the custodial arrangements of the CIS;
  • CIS assets should be segregated from the assets of:
    • the responsible entity and its related entities;
    • the custodian / sub-custodian throughout the custody chain; and
    • other schemes and other clients of the custodian throughout the custody chain (unless CIS assets are held in a permissible omnibus account);
  • CIS assets should be entrusted to a third party custodian that is functionally independent from the responsible entity;
  • the responsible entity should seek to ensure that the custody arrangements in place are disclosed appropriately to investors in the CIS offering documents or otherwise made transparent to investors;
  • the responsible entity should use appropriate care, skill and diligence when appointing a custodian;
  • the responsible entity should, at a minimum, consider a custodian’s legal / regulatory status, financial resources and organisational capabilities during the due diligence process;
  • the responsible entity should formally document its relationship with the custodian and the agreement should seek to include provisions about the scope of the custodian’s responsibility and liability; and
  • custody arrangements should be monitored on an ongoing basis for compliance with the terms of the custody agreement.

(Source: IOSCO Reports on Standards for the Custody of CIS Assets)