ESMA has published a Q&A document on its Guidelines on ETFs and Other UCITS Issues.  The Q&A contains responses to specific queries raised in respect of the following areas: 

  • Information to be inserted in the prospectus
  • UCITS ETF label
  • Secondary market
  • Efficient portfolio management techniques
  • Financial derivative instruments
  • Collateral management
  • Transitional provisions

The full Q&A can be accessed through the following link: http://www.esma.europa.eu/system/files/2013-314.pdf

Disappointingly, the following areas that did need more clarification were not addressed:

  • Secondary market - clarification of “investors” in respect of whom the direct right of redemption applies
  • Securities lending revenue - explanation of the term “direct and indirect operational costs”
  • Financial indices – further information on the construction of indices by a small number of market participants not being an adequate benchmark

In addition, the requirement that collateral received be diversified so that exposure to any issuer does not exceed 20% of the NAV of the UCITS (paragraph 43(e) of the Guidelines), has been addressed.  Surprisingly, the Q&A clarifies that, in the case of government bonds, this limit applies to the issuers and not to the issue.  Exposure to any one government issuer, or any individual issuer, is limited to 20% of the NAV of the UCITS and accordingly delivery of T-Bills as sole collateral will no longer be acceptable.