From the Regulators

IOSCO seeks feedback on principles to safeguard assets held in “collective investments schemes”

By James Langton |

In the wake of traumatic market events, such as the failure of Lehman Brothers and the Madoff fraud, global securities regulators are considering a new set of principles designed to ensure the safekeeping of client assets.

The International Organization of Securities Commissions (IOSCO) launched a new consultation paper today proposing principles to govern the custody of assets held in "collective investment schemes" (CIS), such as investment funds. IOSCO says that the report is seeking feedback from investment managers, custodians, institutional investors, and others on developing a set of principles to ensure the segregation and protection of client assets.

IOSCO first published guidance in this area back in 1996. However, it says that events such as the bankruptcies of Lehman Brothers and MF Global, along with the Madoff fraud, have called for greater attention on CIS asset protection regimes.

Moreover, markets have changed significantly since then. For instance, it notes that fund managers tend to invest more in complex instruments today than they did back in the 1990s. And, it says that the increased diversity in their portfolios has increased the use of sub-custodians in foreign jurisdictions, resulting in longer, more complex chains of custody. Additionally, the widespread use of electronic recordkeeping to register and track ownership changes in securities is "transforming market practices and processes, creating new challenges and risks".

The paper also follows a survey of 27 jurisdictions that sought information about the legal, regulatory and operational landscape for asset safekeeping. Based on the results of this work, it proposes nine principles aimed at identifying the core issues that regulators should be reviewing.

IOSCO is seeking comment on the paper by December 10, with a view to finalizing a report and adopting a new set of principles.