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Iosco publishes due diligence good practices

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The International Organization of Securities Commissions’ Technical Committee has published a final report containing good practices in relation to investment managers’ due diligence wh

The International Organization of Securities Commissions’ Technical Committee has published a final report containing good practices in relation to investment managers’ due diligence when investing in structured finance instruments.

The guidelines are 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 by collective investment schemes (CIS) offered to retail investors.

They state that when assessing structured finance instruments, investment managers should assess the availability, reliability and relevance of information available both on the market and on the underlying assets.

The unique properties of the specific pool should not be assumed to be identical to the broader asset category, and the analysis of the structure of the SFI should be conducted in both normal and stress scenarios.

The report says due diligence should rely on the following three ongoing steps:

1) The underlying assets of the SFI, since they will drive the cash flows of the SFI;
2) The structure of the SFI, including its cash flow structure, how risks are mitigated or increased, and what role third parties play in the structure; and
3) The consistency of investing in the SFI with the mandate of the CIS and with the way it has been marketed to investors, and the ability of the asset manager to handle the investment in that SFI.
 
The practices were developed in cooperation with industry representatives following the recommendation made in the report of the Task Force on the Subprime Crisis, published in May 2008, that the Technical Committee’s Standing Committee on Investment Management conduct work, and develop good practices, on investment managers’ due diligence processes and procedures.

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