The International Organization of Securities Commissions’ Technical Committee has published a report for consultation that aims to establish principles for the supervision of outsourcing arrangements.

IOSCO has published for public comment a report that sets out a set of principles that are designed to assist markets and market authorities when considering outsourcing arrangements. It notes that there are benefits to outsourcing, but that the practice also “poses important challenges to the integrity and effectiveness of the financial and capital markets and for the market authorities that are similar to the ones identified for the financial market intermediaries.

“Hiring a third party to perform a function may have a detrimental impact on its understanding of how the function is performed and the related processes, with a consequent loss of control,” it notes.

In most jurisdictions, the outsourcing market, including its board of directors and senior management, remain fully responsible (toward members and regulatory authorities) for the outsourced function, the report says. And, in some jurisdictions, authorities impose restrictions on the outsourcing of certain functions where they believe the arrangement introduces an unacceptable risk or is critical to the function of a market.

“There is the potential that the inappropriate selection of a service provider may lead to a business disruption or non-compliance with relevant laws, with negative consequences for the outsourcing market’s members and their clients. In certain instances, the potential for systemic risk to the market as a whole, which may be exacerbated in the event that multiple markets use a common service provider, also should be considered,” it says. “In addition, market authorities expect, and in some jurisdictions require, that they will have complete and ready access to books and records concerning an outsourcing market’s activities, even if such documents are in the custody of the market’s service provider.”

The regulatory principles for dealing with these sorts of issues are out for comments until May 20. After the comments are taken into account, the report and principles will be finalized.