Following on from its October 2014 consultation, on 10 November 2015, the International Organization of Securities Commissions (IOSCO) published its final Report on Standards for the Custody of the assets of collective investment schemes.
The report builds on previous IOSCO principles, papers on the subject and survey responses from twenty-seven jurisdictions (including Ireland). The consultation sought responses on a number of proposed principles or standards about the legal, regulatory and operational landscape for CIS asset safekeeping. In summary, the standards are generally consistent with developments in the depository regime under AIFMD and UCITS V. The report also explores the key risks associated with the custody function having regard to recent market developments.
The report sets out eight standards, aimed at identifying the core issues that should be kept under review by the regulatory framework. The standards address both general aspects of the custody function and issues relating more specifically to the appointment and ongoing engagement of custodians. The proposed principles are:
- The regulatory regime should make appropriate provisions for the custodial arrangements of the CIS.
- CIS assets should be segregated from the assets of the responsible entity (usually the manager), related entities, the assets of the custodian and any sub-custodian and the assets of their client throughout the custody chain (unless CIS assets are held in a permissible omnibus account).
- CIS assets should usually 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 to safe keep CIS assets.
- 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 custody arrangements should be formally documented and should include provisions about the scope of the custodian's responsibility and liability.
- Custody arrangements should be monitored on an ongoing basis for compliance with the custody agreement.