By Yakubu LAAH InvestAdvocate
Lagos (INVESTADVOCATE)-World securities regulator, the International Organisation of Securities Commissions (IOSCO) on Tuesday published a report Standards for the Custody of Collective Investment Schemes’ Assets(CIS Assets) which focused on the avoidance of the reoccurrence of Lehman Brothers, Madoff fraud incidents.
The IOSCO report which focused attention on CIS asset regimes seeks to clarify, modernise and further develop international guidance for the custody of CIS assets consistent with IOSCO’s core Objectives and Principles of Securities Regulation, June 2010 (IOSCO Principles), the global securities regulator said in a statement.
It identifies some of the key risks associated with the custody of CIS assets, such as operational risk, misuse of CIS assets, risk of fraud or theft, and information technology risk.
According to IOSCO, the report sets out eight (8) standards divided into two (2) 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 section focuses on key aspects relating to the custody function. It reaffirms the importance for the regulatory framework to provide for suitable custodial arrangements to be in place, clear segregation requirements and appropriate independence.
While, the second part of the report is dedicated to standards relating more specifically to the appointment and ongoing monitoring of custodians.
Other market developments in recent years prompted IOSCO to revisit its paper on Guidance on Custody Arrangements for Collective Investment Schemes, published in 1996 include: a tendency by CIS managers to invest more in complex instruments today than they did in the 1990s, the widespread use of electronic book entry to register and keep track of ownership changes in securities, which has led to a major change in market practices and processes, creating new challenges and risks.
Also, evidence that CIS managers are also becoming more active in making CIS assets “work” for their clients and increase in the diversification and internationalisation of CIS portfolios since 1996, which has given rise to new cross-border challenges prompt the need for this report, the world securities regulator said.
According to IOSCO, the eight (8) standards include first and foremost that the regulatory regime should make appropriate provision for the custodial arrangements of the CIS
Secondly, it recommended that CIS assets should be segregated from the assets of the responsible entity and its related entities, the assets of the custodian / sub-custodian throughout the custody chain and the assets of other schemes and other clients of the custodian throughout the custody chain (unless CIS assets are held in a permissible omnibus account).
Standard three (3) states that CIS assets should be entrusted to a third party custodian that is functionally independent from the responsible entity, while four (4) affirms that 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 fifth and sixth says that the responsible entity should use appropriate care, skill and diligence when appointing a custodian and the responsible entity should at a minimum, consider a custodian’s legal / regulatory status, financial resources and organisational capabilities during the due diligence process.
While the seventh and eight (8) standards states that 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 the custody arrangements should be monitored on an ongoing basis for compliance with the terms of the custody agreement.
