ESMA has published its finalised guidelines on Exchange Traded Funds (ETFs) and other issues related to UCITS. The guidelines will require:

  • UCITS that fall under the definition of UCITS ETFs to carry the identifier “UCITS ETF” in their name;
  • UCITS ETFs to open the fund for direct redemptions if necessary to ensure appropriate redemption conditions for secondary market investors;
  • UCITS entering into efficient portfolio management techniques (EPM) like securities lending activities to inform investors clearly about these activities and the related risks. The guidelines also put in place safeguards on securities lending activities;
  • UCITS receiving collateral to mitigate counterparty risk from OTC financial derivative transactions or EPM techniques to ensure the collateral complies with prescriptive and strict conditions and limitations; and
  • UCITS investing in financial indices to ensure investors get the full calculation methodology of financial indices. UCITS should invest only in financial indices with specific characteristics.

ESMA is also consulting on appropriate treatment of repo and reverse repo arrangements in the context of the guidelines on ETFs and other UCITS issues. It suggests a regime for repo and reverse repo arrangements which would allow a proportion of the UCITS’ assets to be non-recallable at any time at the initiative of the UCITS. Its suggestions include several safeguards to limit the risks of these arrangements. ESMA seeks views on these proposals by 25 September and will publish the final consolidated version of the guidelines following assessment of responses. (Source: ESMA Publishes ETF Guidelines and Consults on Repos)