The Committee of European Securities Regulators (CESR) has published a consultation paper entitled Clarification of the definitions concerning eligible assets for investment by UCITS: can hedge fund indices be classified as financial indices for the purpose of UCITS?

This consultation paper follows the publication of CESR’s consultation paper entitled Can hedge fund indices be classified as financial indices for the purpose of UCITS? The consultation paper now published describes CESR’s conclusions on the issue concerning the ability of hedge fund indices to fall within the definition of "financial indices" contained in the UCITS Directive.

CESR’s decision to review in more detail the issues arising from the potential inclusion of hedge fund indices in UCITS needs to be seen in the wider context of CESR’s final advice to the European Commission on the clarification of definitions concerning eligible assets for investments of UCITS that was published in January 2006. CESR’s final advice set out in detail its views on the criteria that should be met by a financial index for derivatives in order for the index to be an eligible investment.

The measures proposed will be adopted by CESR at level 3 of the Lamfalussy process. At level 1 of the Lamfalussy process the UCITS Directive sets out the overall framework for the operation, at EU level, of harmonised collective investment undertakings. A level 2 implementing Directive on eligible assets (expected to be published in March 2007) will clarify certain definitions in the UCITS Directive that are related to eligible assets, including financial indices. The level 3 measures will focus on improving the co-operation between national regulation so as to ensure consistent application of the level 1 and level 2 measures across Member States.

Currently, CESR’s views on the eligibility of hedge fund indices includes:

  • There is no need for additional level 3 guidelines on the issue of hedge fund indices diversification.
  • A hedge fund index will not meet the criterion of “representing an adequate benchmark” if UCITS does not confirm that the index provider clearly defines and publically makes available an explanation of what the index represents and assesses whether the methodology of the index construction will affect the extent to which it is representative for the market to which it refers.
  • In order to satisfy the criterion of “publication in an appropriate manner” UCITS needs to confirm that the index provider makes publically available the full methodology of the index and UCITS confirms that the index will be subject to an independent audit at least annually.

Comments on the consultation paper are due by 16 April 2007.