The European Securities and Markets Authority (“ESMA”) has recently issued opinions on certain matters relevant to UCITS including the so-called 'trash bucket' and rules relating to the use of Repos.
In particular, ESMA has clarified the scope of the investment derogation provided for in Article 50(2)(a) of Directive 2009/65/EC (the “UCITS Directive”). This opinion has been issued as a result of questions being raised as to the correct interpretation of Article 50(2)(a). In addition, ESMA has issued guidelines on the manner in which a UCITS may enter into repurchase and reverse repurchase agreements which are intended to ensure that a relevant UCITS can continue to effect redemptions in accordance with its offer documents.
Overview of Opinion on “10% Allocation”
Article 50(2)(a) provides that a UCITS may not invest more than 10% of its assets in transferable securities and money market instruments other than those provided for in Article 50(1) of the UCITS Directive (the “10% Allocation”).
The ESMA opinion states that the 10% Allocation refers only to investments in transferable securities and money market instruments and does not extend to units or shares of collective investment schemes (“CIS”). Accordingly, a UCITS may not invest in the units or shares of another CIS unless that CIS meets the eligibility criteria set out in Article 50(1)(e) of the UCITS Directive.
EMSA expects that any portfolio adjustments made to ensure compliance with its opinion will take into account the best interests of investors, and will be undertaken by 31 December 2013 at the latest.
Consequences of Opinion on “ 10% Allocation”
Until now, the Central Bank, in common with many other EU regulators, has permitted UCITS to hold units or shares in unregulated CIS, such as hedge funds, as part of their 10% Allocation.
The ESMA opinion will have an impact on UCITS which hold units or shares in such unregulated CIS or in any other CIS which do not provide a level of investor protection equivalent to a UCITS.
We will advise you of the position taken by the Central Bank in response to the ESMA opinion once this is known.
We recommend that each UCITS consider its portfolio to determine whether any assets within its 10% Allocation fall within the scope of the ESMA opinion. If so, these assets will need to be divested by 31 December 2013.
Overview of Repurchases and Reverse Repurchases Guidelines
These guidelines arise in the context of a report published during the summer by ESMA which provided guidelines on ETFs and other UCITS issues and included a consultation paper seeking to identify the most appropriate approach to the recallability of repurchase and reverse repurchase agreements.
The new ESMA guidelines state that a UCITS entering into a repurchase agreement should ensure that it is able, at any time, to recall any securities that are the subject of the repurchase agreement or to terminate the repurchase agreement.
In relation to reverse repurchase agreements, a UCITS should be in a position at any time to recall the full amount of cash on either an accrued basis or a marked-to-market basis, or to terminate the reverse repurchase agreement. When the cash is recallable on a marked-to-market basis, the marked-to-market value of the reverse repurchase agreement should be used for the calculation of the net asset value of the UCITS.
For these purposes, fixed-term repurchase and reverse repurchase agreements that do not exceed seven days are considered to be arrangements that allow the assets to be recalled at any time by the UCITS.
Consequences of Repurchase and Reverse Repurchase Guidelines
UCITS will no longer be able to enter into fixed term repurchase and reverse repurchase arrangements that do not allow them to at least, as appropriate, (i) recall at any time the assets; (ii) recall at any time the full amount of cash, or (iii) terminate the agreement.
Previously, cash (in the context of a reverse repurchase agreement) was only recallable on an accrued basis. Now UCITS have the option of recalling the cash on a marked-to-market basis.
These guidelines (together with the other elements of the ESMA guidelines, published during the summer, dealing with ETFs and other UCITS issues) are expected to become binding on UCITS two months after publication of translations thereof into all EU languages (which is expected to be early in 2013). It is anticipated that an existing UCITS will have 12 months from then to align its portfolio with the guidelines.
Link to the full ESMA opinion guidelines on 10% Allocation and the relevant excerpts of the UCITS Directive, is set out below:
Link to the full ESMA guidelines on repurchases and reverse repurchases is set out below: