27 March 2013

EBF publishes response to IOSCO consultation on protection of client assets

Key Points:

• The EBF would like to recall that at European level, the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive have already introduced highly resilient standards on the protection of client assets.
• The EBF strongly believes that the IOSCO principles should clarify that holding client assets in omnibus accounts remains acceptable.
• Clients invest worldwide in financial instruments and for a majority of intermediaries it is impossible to assess all client asset regimes and arrangements in the relevant foreign jurisdictions. Intermediaries should be able to rely on sub-custodians directly or indirectly used by the intermediary. These sub-custodians should be selected with due care.
• The EBF highlights that the definition of “intermediaries” is too broad and creates legal uncertainty. In case that the definition is meant to cover (central securities) depositories, the EBF points out that the key role of the depository is to properly hold and facilitate the exchange of securities. Therefore, IOSCO should clarify that the decision to invest in a specific security in a specific jurisdiction is not the responsibility of the depository.
• The primary responsibility for evaluating the risks associated with segregation and conducting cross border business should remain with the client. Intermediaries have very limited scope to apprise the client in the context of their investment decisions from a client asset perspective, and although an intermediary may provide risk warnings or general information to clients, the operation of insolvency laws, circumstances specific to the client and other regulation are likely to be such that only the client can have a full picture of the risk profile of its cross-border business.
• The EBF understands that the problems related to client asset protection caused by the collapse of Lehman Brother and MF Global derived mainly from a poor state of book-keeping and from specific issues in connection with the re-hypothecation of assets under prime brokerage agreements. The EBF would therefore welcome evidentiary clarity between the concerns associated with these two failures and the IOSCO recommendations. Otherwise, there is a risk that the IOSCO recommendations will apply to intermediaries and situations unrelated to the collapse of these entities.
• The EBF believes that IOSCO’s principles should differentiate between: (i) types of intermediaries such as depositories, custodians, settlement agents, asset manager and prime brokers, (ii) types of assets, at least between financial instruments and cash, (iii) types of services provided and (iv) types of clients (professional or retail). Finally, the EBF and its members support international cooperation between regulators, which of course is the prime mandate of IOSCO. Such international co-operation will be key to meeting these regulatory objectives, avoiding regulatory arbitrage and ensuring successful implementation of these recommendations.

See link for specific remarks.

Full response

© EBF