AFME published its response to the IOSCO Consultation Report on Principles regarding the Custody of Collective Investment Schemes’ Assets of October 2014.
AFME proposed that IOSCO provide a set of definitions to conform the meaning of certain words and phrases used in the Consultation Report; in particular, the terms “collective investment schemes” or ”CIS”, ”custody”, “custody services” and “custodian”. The core of custody services, in AFME’s view, is the provision of safekeeping services (e.g. recording rights to securities), which may be accompanied by trade settlement services and asset servicing services.
Segregation between an intermediary’s own and the assets of its direct clients, combined with adequate reconciliation, should be executed at each level of the chain of intermediaries, to assure investor protection. AFME does not favour a mandatory client by client segregation of CIS assets throughout the custody chain, as it does not necessarily provide any greater protection in the event of the insolvency of a custodian or sub-custodian but increases complexity and costs that ultimately have to be borne by investors.
The liability of a custodian towards the responsible entity is based on the national laws that regulate the delivery of the relevant services. It essentially relates to the risks that: (i) the custodian fails to comply with its contractual obligations; (ii) the custodian causes harm for which it is legally responsible outside of its contractual responsibilities; and (iii) the custodian or a person for whom the custodian is responsible takes the property of the client without a legal basis for doing so.
Full AFME response
© AFME
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