How UCITS should calculate their counterparty risk for exchange-traded derivatives and OTC transactions that are centrally cleared under EMIR: update ESMA Q&A

The European Securities and Markets Authority (ESMA) released an updated Q&A on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS dated 19 December 2013. This Q&A gives colour to the ESMA guidelines on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS.

A new question has been added on the topic of calculation of counterparty risk for exchange-traded derivatives and centrally-cleared OTC transactions. This is a step forward and we look forward to further clarity on this issue in 2014.

The new question asks: "How should UCITS calculate their counterparty risk for exchange-traded derivatives and OTC transactions that are centrally cleared under the European Market Infrastructure Regulation (EMIR)? " The answer is that: "When calculating the counterparty risk for exchange-traded derivatives and OTC transactions that are centrally cleared, UCITS should look at the clearing model used to determine the existence of counterparty risk and, if any, where the counterparty risk is located. When analysing the clearing model used, UCITS should have regard to the existence of segregation arrangements of the assets and the treatment of claims on these assets in the event of bankruptcy of the clearing member or central counterparty."

A footnote points out that ESMA is continuing its work on the issue of calculation of counterparty risk by UCITS for exchange-traded derivatives and centrally-cleared OTC transactions in light of the provisions of EMIR. ESMA plans to issue more detailed guidance on this issue, dealing with such aspects as the status of the central counterparty and the level of segregation to be put in place by the UCITS, early in 2014.

Irish Collective Asset-management Vehicle (ICAV) Bill

The long awaited General Scheme of the Irish Collective Asset-management Vehicle (ICAV) Bill has been published on the Department of Finance website. The General Scheme was approved for legal drafting by the Government at its meeting on Tuesday, 17 December. The Minister for Finance, Michael Noonan, said "I intend to push ahead with the drafting of the Bill as a matter of priority”. The General Scheme remains true to the original concepts as outlined previously but more detail is now available. The ICAV proposal will minimise the administrative complexity and cost of establishing and maintaining funds Ireland and promises to bring certain tax advantages for US investors.