Thematic Review 2015 - Alternative Custody Arrangements of Open Ended Collective Investment Schemes (2016-02-04)

Summary

This is a thematic review report published by the GFSC summarising findings from a 2015 survey of open ended Class B and Class Q collective investment schemes that had been granted waivers (rule derogations) from standard custody requirements, for example where prime brokers or other non Guernsey custodians act as custodian. It is informational and reports on industry practice rather than introducing new binding rules, but it signals the Commission's expectations for oversight going forward.

• Scope of review: Questionnaire sent to 26 designated managers covering 171 open ended schemes; only schemes with alternative custody arrangements (22 current derogations) were required to respond.
• Rehypothecation findings: Most schemes permitted rehypothecation of assets in scheme documents, but monitoring practices varied widely, from intraday online monitoring to reliance on annual audit alone.
• Oversight responsibility: In most cases the scheme's Board retained responsibility for oversight of the designated manager and custodian, though some schemes shared this with the designated manager.
• Good vs poor practice: The Commission set out examples of good practice (daily/intraday monitoring, regular Board reporting on counterparty exposure) and poor practice (reliance on quarterly Board review and annual audit only).
• Forward looking expectations: Firms seeking future modifications of the custodian rules will be asked to provide details of their proposed risk management framework, and future thematic reviews may not be voluntary.

The Commission encourages all firms with alternative custody arrangements to review their own oversight and risk management frameworks against the good practice examples described, even though the review itself does not impose new formal rules.

Key obligations

• Firms considering requesting a modification (derogation) of the custodian rules must provide details of their proposed risk management framework to the Commission when seeking such a modification.

Applies to

Open ended collective investment schemes (Class B and Class Q), Designated managers, Designated administrators, Custodians/trustees, Fund Boards