On 10 October 2014, IOSCO published a consultation report on a set of nine principles relating to the custody of assets of collective investment schemes (CIS).

The consultation aims to gather the views of investment managers, custodians, institutional investors and other interested parties on the development of a set of principles for the custody of CIS assets. The report builds on previous IOSCO papers on the subject and survey responses from twenty-seven jurisdictions (including Ireland). The survey sought information about the legal, regulatory and operational landscape for CIS asset safekeeping in each of those jurisdictions.  The report explores the key risks associated with the custody function having regard to recent market developments.  In summary, the principles are generally consistent with developments in the depository regime under AIFMD and UCITS V.

The report proposes nine principles, divided into two sections aimed at identifying the core issues that should be kept under review by the regulatory framework. The principles 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, related parties, 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.
  • The custodian should be 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 to 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.

The consultation closes on 10 December 2014.