ESMA published guidelines on ETFs and other UCITS issues on 18 December 2012.
Since the entry into force of the guidelines on 18 February 2013, ESMA has been asked by stakeholders to reconsider its position on the requirements on collateral diversification on the basis that they have a significant adverse impact on UCITS’ collateral management policies.
Collateral diversification requirements
Paragraph 43 e) of the guidelines provides that:
- Collateral received by a UCITS should be sufficiently diversified in terms of country, markets and issuers.
- The criterion of sufficient diversification with respect to issuer concentration is considered to be respected if a UCITS receives from a counterparty a basket of collateral with a maximum exposure to a given issuer of 20% of the net asset value of the UCITS.
- When a UCITS is exposed to different counterparties, the different baskets of collateral should be aggregated to calculate the 20% limit of exposure to a single issuer.
In its Q&A on the guidelines, ESMA confirmed that exposure to any one government issuer is limited to 20% of the net asset value of the UCITS.
ESMA Consultation Paper
ESMA issued a Consultation Paper on 20 December 2013 in which it set out a proposal for amending paragraph 43(e). The proposal provides for a partial derogation to be granted to a UCITS that meets the criteria for the definition of Money Market Fund or Short-Term Money Market Fund in CESR’s Guidelines on a Common Definition of European Money Market Funds. Any such UCITS would be permitted to receive collateral up to 100% of the UCITS’ net asset value in different transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third-country, or a public international body to which one or more Member States belong. Such a UCITS would be required to receive securities from at least six different issues, but securities from any single issue could not account for more than 30 % of the collateral received.
The derogation outlined above would not affect the other criteria for collateral management as set out in paragraphs 41 to 47 of the guidelines.
Central Bank of Ireland guidance on the implementation of the ESMA Guidelines on ETFs and other UCITS Issues
Paragraph 65 of the guidelines provides that UCITS in existence before 18 February 2013 must align their portfolio of collateral with the requirements set out in the guidelines by 18 February 2014.
In light of ESMA’s Consultation Paper, the Central Bank has stated, in guidance issued by it on 23 January 2014, that it is reasonable for a UCITS money market fund authorised before 18 February 2013, to delay its compliance with paragraph 43 e) until such time as ESMA has issued its feedback and concluded the consultation process.
It is currently unclear when the entire consultation process will end but ESMA has requested that responses to the Consultation Paper be submitted by 31 January 2014.
William Fry will keep you updated of further developments in this context.
Annual Reports issued by UCITS - Disclosure Requirements
In accordance with Guideline 35 d) of the guidelines, the UCITS Notices require the following disclosure to be included in the annual reports issued by UCITS:
The revenues arising from efficient portfolio management techniques for the entire reporting period together with the direct and indirect operational costs and fees incurred. (ref: paragraph 9, Appendix A to Notice UCITS 8).In its guidance, the Central Bank expressed the view that a reasonable interpretation of the reference to “revenue” in Guideline 35 d) (subject to any clarification which may be provided by ESMA) would be that it is applicable only to revenue from securities lending arrangements and repurchase/reverse repurchase agreements.