ASIC has welcomed the recent release of the International Organization of Securities Commissions' (IOSCO) Custody Standards as further recognition of the importance of strong custodial arrangements. Their release follows the strengthening of domestic requirements for custodians in Australia in recent years.

ASIC has played a leading role in developing these international standards over the last two years and was able to utilise its domestic custody engagement during development of:

• ASIC Regulatory Guide 133 Managed investments and custodial or depository services: Holding Assets (RG 133) released in November 2013; and
• ASIC Regulatory Guide 166 Licensing: Financial requirements (RG 166) mandating new financial requirements for responsible entities and custodians which hold assets, with effect from 1 July 2013.

These regulatory guides and related class orders significantly strengthened the existing custody framework, providing protection for investors in registered schemes and users of custody generally.   Compliance with the final requirements from these changes was required by 1 November 2015.

ASIC Chairman, Greg Medcraft, also current Chair of the IOSCO Board, said, 'We are pleased that ASIC has been able to take an instrumental role in shaping the standards of custody internationally'.

ASIC Commissioner Greg Tanzer added, 'We are confident that our own domestic requirements in RG 133 and RG 166 are consistent with, and in some areas surpass, the standards set out in the IOSCO report. We have been doing a significant amount of work in the area of custody since early 2011, which is reflected in ASIC's new framework'.

The updated RG 133 established new minimum standards requiring assets holders to maintain an adequate organisational structure (including a separation of function for custody and non-custody business), staffing capabilities, capacity and resources. In addition, custodial assets must be held on trust and segregated, subject to the use of omnibus accounts on condition. Custody agreements with IDPS operators, MDA operators and certain retail clients are also covered. The transition period for compliance with the new contract requirements ended on 1 November 2015. We have been continuing to liaise with industry regarding compliance.

Our domestic requirements are consistent with the IOSCO standards, such as:

• IOSCO Standards 5 and 6 set out new requirements in relation to the selection and appointment of custodians. Similarly, RG 133 strengthened the requirements regarding the initial selection by a responsible entity of the custodian, and custodian of its sub-custodians;
• IOSCO Standards 7 and 8 require the responsible entity to document the relationship with the custodian and monitor compliance thereafter. The requirements in RG 133 require custody and sub-custodian agreements to contain certain terms and provide the appropriate protection for the client and the underlying investors.

ASIC's guidance requires vertically integrated entities, which perform custody and responsible entity, trading functions and other services, to have functional separation and independent reporting lines so that, essentially, the custody arm is 'independent' of the remaining non-custody business. Mr Tanzer  noted that functional independence is critical for minimising any opportunities for conflicts of interest.

Background

The Board of IOSCO published its final report on 10 November 2015 entitled Standards for the Custody of Collective Investment Schemes’ Assets. The report establishes eight international standards for the custody of managed fund assets, consistent with IOSCO’s core Objectives and Principles of Securities Regulation, June 2010.

IOSCO Standards for the Custody of Collective Investment Scheme Assets

Standard 1: The regulatory regime should make appropriate provision for the custodial arrangements of the CIS.

Standard 2: 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 3: CIS assets should be entrusted to a third party custodian that is functionally independent from the responsible entity.

Standard 4: 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.

Standard 5: The responsible entity should use appropriate care, skill and diligence when appointing a custodian.

Standard 6: The responsible entity should at a minimum, consider a custodian's legal regulatory status, financial resources and organisational capabilities during the due diligence process.

Standard 7: 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.

Standard 8: Custody arrangements should be monitored on an ongoing basis for compliance with the terms of the custody agreement.

For a copy of the new standards, refer here.

For more information about the relevant ASIC guidance and class orders, refer 13-314MR ASIC releases revised guidance on custody.