The Asset Management and Investment Funds Group is pleased to announce that the Financial Regulator has now confirmed that share classes with exposure to different derivative contracts may be established within retail funds, including UCITS funds.
This development represents an important enhancement of the existing rules and framework applicable to the establishment of share classes. To date, it has been permitted to employ derivatives at share class level for the purpose of hedging currency risk. These rules have now been extended to cover hedging of interest rate risk at share class level. In addition, retail funds, including UCITS funds, may now establish distinct share classes with different structured returns. This approach facilitates the structuring of returns based on variables such as level of participation in an underlying portfolio or index, level of capital protection and return maturity date.
The Financial Regulator has noted the following requirements in the context of a retail fund seeking to structure returns based on different levels of participation in underlying portfolios/indices and different levels of capital protection:
- The financial derivative instrument for each share class must be based on the same underlying portfolio or index;
- The arrangements cannot result in a leveraged return per share class, ie the participation rate can be up to but cannot exceed 100% of the relevant share class's performance of the underlying portfolio;
- The board of the fund/management company as appropriate (the “Board”), must confirm that they have reviewed and are satisfied that the proposed arrangements will not cause any prejudice to investors in one share class over the investors in another share class; and
- The Board must confirm that there will be no cross liability between the share classes.
For professional investor funds and qualifying investor funds, the
policy changes will permit additional features at share class level
such as, for example, leverage and participation based on different
sub-indices of a single initial index. These types of proposal will be
considered by the Financial Regulator on a case-by-case basis.
For these types of fund, it will also be possible to structure share
classes that may differ in their ability to participate in "New Issues".
The Asset Management and Investment Funds Group had made submissions to the Financial Regulator on these issues and welcomes the Financial Regulator’s position in relation to this matter, as it represents a significant advance in terms of increased flexibility and efficiencies delivered through the innovative use of share classes within Irish funds. Fund promoters will be aware that this opens the door to a new range of product structuring options and considerable cost savings in the context of global distribution.
Should you wish to discuss this briefing note in further detail, please do not hesitate to contact your usual Asset Management and Investment Funds Group contact at the details provided.