The European Securities and Markets Authority (“ESMA”) has issued an opinion dated 20 November 2012 (the “Opinion”) in the context of UCITS’ ability to invest up to 10% of net assets in transferable securities and money market instruments other than those traded on a regulated market, as referred to in Article 50(1) of the UCITS directive.

ESMA has issued the Opinion on the basis that questions had emerged about the correct interpretation of the 10% derogation, and whether it includes investment in collective investment undertakings.

In order to ensure uniform application of this provision across member states, ESMA states that the derogation allowing for the “10% ratio” refers only to investments in transferable securities and money market instruments, and that there is no derogation with respect to investment in collective investment undertakings. ESMA has opined that a UCITS may only invest in other UCITS or funds that are subject to equivalent supervision as UCITS and which provide an equivalent level of investor protection as UCITS.

With respect to portfolio adjustments which may be required to ensure compliance with the Opinion, ESMA expects that these will be made, taking into account the best interest of investors, at the latest by 31 December 2013.

Irish Position

Until now, the 10% ratio had been interpreted by the Central Bank of Ireland (the "Central Bank") to permit UCITS’ investment in unregulated investment funds, including hedge funds, provided that the investment complied with the eligibility criteria for transferable securities. We understand that the Central Bank will issue a clarification on the position in the coming days, consistent with the ESMA Opinion.

Clients with funds which have applied the Central Bank interpretation of permitted investments within the 10% ratio should contact their client team at Matheson and we will advise you on next steps.  We will also be contacting clients directly where we believe the ESMA interpretation may affect them.

A copy of the Opinion is available here.