ESMA issued an opinion on 30 January 2017 which sets out four high-level principles for achieving a level playing field among existing EU investment fund markets (the “Opinion”).
The Opinion reverberated in Luxembourg, as the Commission de Surveillance du Secteur Financier (the “CSSF”) expects Luxembourg UCITS to take the necessary measures to conform with the transitional provisions set out in the Opinion (CSSF press release 17/06).
To ease the transition, non-compliant operating share classes have a certain timeframe in which to cease their activities (within 6 to 18 months from the issue of the Opinion).
I. The high-level principles
Common investment objective
Share classes of the same fund or sub-fund should have a common investment objective reflected in a common pool of assets.
According to ESMA, hedging arrangements at share-class level are inconsistent with the requirement for a fund to have a common investment objective. It is worth noting that ESMA admits one exception concerning currency risk hedging insofar as it is considered as supporting the single market among the EU Member States.
In the absence of asset segregation among share classes, the additional risk may spread to other share classes. To mitigate and monitor such additional risks, ESMA sets out some minimum operational requirements (i.e. a level of operational and accounting segregation, stress tests, a pre-defined and transparent hedging strategy and keeping hedged positions under review).
In the interests of providing consistent information on UCITS features, ESMA supports that all features of a share class should be pre-determined before the share class is set up. Notwithstanding the above, this requirement neither limits the discretion of any UCITS management company as to the type of derivatives used to hedge currency risk nor its operational implementation.
Whether or not there are participants in the share class, the investors are entitled to be informed of the existence and nature of all share classes via the fund prospectus. Additionally, a list of share classes exposed to the contagion risk must be disclosed by the UCITS management company.
In view of the potential detrimental effects on the EU fund markets, non-compliant share classes may continue operating until (at the latest):
- 30 July 2017 for investments by new investors; and
- 30 July 2018 for additional investments by existing investors.