ESMA recently announced that it has published the official translations of its updated guidelines on ETFs and other UCITS issues.

Collateral diversification requirement

Paragraph 43(e) of ESMA’s original guidelines on ETFs and other UCITS issues, published in December 2012, requires that all collateral used to reduce counterparty risk exposure be sufficiently diversified in terms of country, markets and issuers. On 20 December 2013, ESMA published a consultation paper in which it proposed granting UCITS money markets funds (MMFs), a derogation from this requirement. ESMA proposed that a UCITS MMF be permitted to receive collateral of up to 100% of its net asset value in different transferable securities and money market instruments issued or guaranteed by an EU Member State, one or more of its local authorities, a third country, or a public international body to which one or more EU Member States belong, provided that:

  • Such UCITS would receive securities from at least six different issues
  • Securities from any single issue would not account for more than 30% of the collateral received

Taking into account feedback received from the consultation, ESMA confirmed, in its final report on the revision of the collateral diversification provisions, that all UCITS would be permitted to avail of the derogation, subject to compliance with the conditions set out above. 

Transitional period

Now that the official translations of the updated guidelines have been published, all European regulators, including the Central Bank of Ireland, have two months to notify ESMA of their intention to comply or not comply with the updated guidelines. The clock has now started to tick and we will keep you posted as to the Central Bank’s position. However, we anticipate that the Central Bank will adopt the updated guidelines in full.