ESMA issued guidelines on Exchange-Traded Funds (ETFs) and other UCITS issues. The guidelines will apply to national securities markets regulators and UCITS management companies (this will include self-managed investment companies or SMICs also). The guidelines’ key provisions are:
- UCITS that meet the definition of UCITS ETFs will have to carry the identifier “UCITS ETF” in their name;
- UCITS ETFs will have to ensure appropriate redemption conditions for secondary market investors by opening the fund for direct redemptions when the liquidity in the secondary market is not satisfactory;
- UCITS entering into efficient portfolio management techniques (EPM) like securities lending activities will have to inform investors clearly about these activities and the related risks. All revenues net of operating costs generated by these activities should be returned to the UCITS. When a UCITS enters into securities lending arrangements, it should be able at any time to recall any securities lent or terminate any agreement into which it has entered
- UCITS receiving collateral to mitigate counterparty risk from OTC financial derivative transactions or EPM techniques should ensure that the collateral complies with very strict qualitative criteria and specific limits in relation to the diversification; and
- UCITS investing in financial indices will have to ensure that investors are provided with the full calculation methodology of financial indices. Also, UCITS should only invest in financial indices which respect strict criteria regarding, inter alia, the rebalancing frequency and their diversification.
ESMA has opened a consultation (closing 25 September 2012 and incorporated into the guidelines document above) on the appropriate treatment of repo and reverse repo arrangements in the context of the guidelines on ETFs and other UCITS issues. In particular, ESMA is proposing a distinct regime for repo and reverse repo arrangements which, unlike securities lending arrangements, would allow a proportion of the assets of the UCITS to be non-recallable at any time at the option of the UCITS. The proposed guidelines include safeguards to ensure that the counterparty risk arising from these arrangements is limited, and that UCITS entering into such arrangements can continue to execute redemption requests. When adopted by ESMA, the guidelines on repo and reverse repo arrangements will be integrated into the guidelines on ETFs and other UCITS issues in order to have a single package of rules.
The final guidelines, comprising both the guidelines detailed above and the rules on repo and reverse repo agreements, will become effective two months after publication on the ESMA website of the translations into the official languages of the European Union.