Leverage disclosure requirements for UCITS which utilise VaR
The Central Bank issued guidance on its disclosure requirements for UCITS using a Value-at-Risk (VaR) methodology to calculate global exposure. ESMA issued a Q&A regarding Risk Measurement and Calculation of Global Exposure and Counterparty Risk in July 2012 (as detailed in the July Front Page) which clarified (Q2) that UCITS which use VaR to calculate global exposure must calculate leverage for disclosure purposes using the sum of the notionals of the derivatives used. Leverage is not to be calculated on a net basis (ie after any netting/hedging arrangements are taken into account). UCITS using VaR may, in addition disclose leverage calculated on the basis of the commitment approach. The Central Bank expects leverage disclosure to be located with the UCITS investment objective and policies and permits UCITS to disclose the expected level of leverage and the possibility of higher levels while the annual report must disclose the level of leverage employed during the period. The Central Bank does expect the limitations of this approach to be re-visited by ESMA in due course.
The Central Bank has also confirmed that it will no longer impose a minimum subscription requirement or require the disclosure of limits on the level of leverage employed by Irish authorised UCITS. Existing UCITS whose prospectus imposed a minimum subscription amount and/or a limit on the level of leverage will need to update documentation to benefit from the updated requirements. Moreover, UCITS whose global exposure (based on the sum of the notionals) might have exceeded 500% were required to submit six monthly reports of actual leverage and we understand that they will no longer be required to do so.
Amending UCITS regulations
SI 300 of 2012 EU (UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES) (AMENDMENT) REGULATIONS 2012 were signed on 24 July. These regulations make more specific provision for ESMA and, in particular make provision for the Central Bank to notify ESMA in a variety of circumstances. These include authorisations of UCITS management companies, difficulties which UCITS encounter in marketing their units in non- member states, where the Central Bank considers that a passporting UCITS management company’s home regulator has not acted adequately, emergency measures, the number and type of certain refusals of authorisation, the identities of the companies benefiting from the exemptions provided for in Regulations 48 and 49 (requirement to have a Trustee) and the list of categories of issuers of guaranteed bonds in which a UCITS may invest up to 25% of assets under Reg 70 (3).
Fitness & Probity
The Irish Funds Industry Association (IFIA) has prepared an updated Industry Information Note on Fitness and Probity and an updated Company Secretary Industry Information Note. Without passing detailed comments on the Information Notes, the Central Bank has noted that
“…while such guidance may be helpful to Regulated Financial Service Providers (RFSPs) when determining the individuals that occupy CF roles, it is ultimately the responsibility of the RFSP itself to determine whether an individual is performing a CF role (Section 3.5 of the Guidance on Fitness and Probity Standards refers).“
Regarding the Information Note relating to Company Secretaries which are a corporate entity, the Central Bank’s letter points out that:
“The Central Bank is of the view that the Fitness and Probity Regime applies to the individual who is actually performing or exercising a CF function. In this regard it may be inadequate for a RFSP to only perform due diligence on Directors or Heads of Function. In addition and as indicated previously, the Central Bank’s legal interpretation of the Act is that in accordance with Section 22(4) of the Act a Company Secretary is a significant influence function and a CF role. Thus all individuals in the role of Company Secretary must comply with the Fitness and Probity Regime.”
The IFIA stresses that these Information Notes are intended as a general information guide and individual companies will need to examine their own particular circumstances in order to assess the requirements to be fulfilled to comply with the Standards, as outlined by the Central Bank.
The Central Bank published a revised user manual here relating to the Individual Questionnaire (IQ) for Fitness and Probity. This manual is particularly useful to persons completing an IQ for the first time.
The user manual contains the following revisions:
- It has been divided into two parts. The first part (pages 1-44) contains general guidance. Question specific guidance can be found in Appendix 4 (pages 45-72)
- Step by step guidance on how to export and import IQs.
- Reasons why IQs may be returned.
Changes to Market Abuse, MiFID, Prospectus and Transparency regimes
New Regulations have issued to implement Directive 2010/73/EU in Ireland (as flagged in the July Front Page) and Directive 2010/78/EU. This will embed ESMA into the following regulatory frameworks;
- PROSPECTUS (DIRECTIVE 2003/71/EC) (AMENDMENT) (NO. 2)
- MARKET ABUSE (DIRECTIVE 2003/6/EC) (AMENDMENT)
- EUROPEAN UNION (MARKETS IN FINANCIAL INSTRUMENTS) (AMENDMENT) REGULATIONS 2012
- TRANSPARENCY (DIRECTIVE 2004/109/EC) (AMENDMENT) (NO. 2)
In an investment funds context, changes to the Market Abuse regime essentially impact on listed funds, changes to the Prospectus regime impact on closed ended funds, changes to the Transparency regime impact on listed closed ended funds and changes to the MiFID regime impact on the regulated entities (such as investment managers).