29 July 2009

IOSCO guidelines on due diligence policies

The report provides guidelines on assessing the quality of their due diligence procedures regarding investments in structured finance instruments by collective investment schemes offered to retail investors.

The International Organization of Securities Commissions’ (IOSCO) Technical Committee has published a final report - IOSCO Good Practices in relation to Investment Managers’ Due Diligence When Investing in Structured Finance Instruments. This contains guidelines aimed at assisting both investment management industry participants and regulatory bodies in assessing the quality of their due diligence procedures regarding investments in structured finance instruments (SFI) by collective investment schemes (CIS) offered to retail investors.

 

Key Messages

 

The Investment Manager Due Diligence Practices are based on five key messages that should inform any review, development or reconsideration of due diligence policies and procedures. These are:

 

·         Investing in a structured finance instrument (SFI) is different from investing in a more traditional instrument often referred to as a plain vanilla instrument. The risks are different and call for a tailored due diligence process;

 

·         If you do not understand a SFI, do not buy it;

 

 

·         Due diligence is and must remain a value-added process. It is not and must never become a plain box-ticking process;

 

 

·         Due diligence is generally a three-step and iterative process which is structured around the understanding of the underlying assets of the SFI, of its structure and of how it fits into the CIS mandate; and

 

 

·         Due diligence is not a static process. It is an on-going process which starts at the time the initial investment in the SFI is contemplated and ends when the SFI matures or is divested.

 

These good practices are aimed at assisting industry and regulators in their understanding, assessment and monitoring of investments in SFIs on behalf of CISs. The practices are broken down into the three stages. The three stages are:

 

1. Analysing the underlying assets of the SFI

2. Analysing the structure of the SFI

3. How does the SFI fit into the CIS mandate

 

Press release

Full report

© IOSCO