The Central Bank of Ireland (the "Central Bank") has completed the update of the statutory instrument that forms the basis for the Irish regulatory framework for UCITS.
The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2019 (the "CBI UCITS Regulations") consolidate and replace the existing regulations.
The CBI UCITS Regulations complement the main Irish regulations that implement the UCITS Directive4. These regulations continue to be supplemented by supporting regulatory guidance and Q&As (published by the Central Bank on specific UCITS issues) and make up the complete UCITS regulatory framework.
The publication of the CBI UCITS Regulations follows a consultation process relating to the proposed changes to the existing regulations ("CP119"). The Central Bank also published a Feedback Statement on its consultation process as well as a revised edition of its Central Bank UCITS Questions & Answers document ("UCITS Q&A") which provides additional clarity on the interpretation of a number of the provisions of the CBI UCITS Regulations.
Key changes captured in the CBI UCITS Regulations include:
- New obligations and amendments to prior guidance in relation to UCITS performance fees;
- Amendments to reflect the ESMA Opinion on UCITS Share Classes Hedging;
- Amendments to reflect the implementation of the EU Money Market Funds Regulation6;
- Amendments to periodic reporting requirements for UCITS management companies and depositaries;
- Amendments to the provisions on fees charged by structured UCITS;
- New obligations relating to temporary suspensions of redemptions; and
- Amendments to reflect the requirement to maintain a designated email address.
The Central Bank’s existing guidance on performance fees has been codified in the CBI UCITS Regulations. In addition, the CBI UCITS Regulations also introduce a requirement for performance fees to crystallise and be paid on frequency of no less than annually. The Central Bank has also clarified that the crystallisation and payment of a performance fee by a UCITS upon a redemption is not considered an annual calculation for the purposes of this requirement (UCITS Q&A ID 1091). Importantly, following submissions from industry in response to CP119, there is an 18 month transitional period for UCITS in existence as at 27 May 2019 to comply with the requirement on performance fee crystallisation frequency by 27 November 2020.
The updated UCITS Q&A also provides that it is permissible to charge performance fees at (i) an individual investor level, or (ii) at a share class/fund level, as adjusted for subscriptions and redemptions (UCITS Q&A ID 1090).
ESMA Opinion on UCITS Share Classes Hedging
Changes have been introduced to closely reflect the wording of the ESMA Opinion on UCITS Share Classes. The updated CBI UCITS Regulations now provide that under-hedged positions should not fall below 95% of the portion of the net asset value of the share class which is sought to be hedged.
Financial Reporting Requirements for UCITS Management Companies and Depositaries
The CBI UCITS Regulations impose a requirement on UCITS management companies and depositaries of UCITS to file a second set of accounts with the Central Bank which covers the full twelve months of the financial year-end. This set of accounts must be filed within one month of the end of the relevant reporting period. This obligation has been imposed on UCITS management companies and depositaries since December 2016 although it had previously provided for a two month filing period.
Notwithstanding the submissions made by industry to retain the existing filing period of two months, the Central Bank noted that the rationale for the shortened filing period is to enable supervisors to obtain information in a “timely manner” so that they can take any necessary action arising from their review of the accounts filed.
The CBI UCITS Regulations have also been amended to provide (i) that a UCITS’ first annual audited accounts must include all sub-funds launched as at that date and (ii) that the annual audited accounts include an up to date list of all share classes in issue during the reporting period and also note whether the relevant share class is hedged.
EU Money Market Funds
The CBI UCITS Regulations incorporate amendments arising from the implementation of the EU Money Market Fund Regulation in 2017, including the disapplication of certain overlapping provisions relating to, amongst other items, investment in deposits and efficient portfolio management and collateral. Cash held as Ancillary Liquidity
To date, the Central Bank has imposed different risk spreading rules to UCITS depending on whether a UCITS held cash for investment purposes or ancillary liquidity purposes. Under the CBI UCITS Regulations, when applying the limits on exposure to any one credit institution, UCITS must now aggregate deposits and cash held as ancillary liquidity regardless of whether the cash is for investment purposes or ancillary liquidity purposes.
The CBI UCITS Regulations provide for the ability of a structured UCITS to be subject to a management fee which is calculated based on the initial offer price rather than being based on the net asset value of the relevant class.
Through submissions made in response to CP119, industry had raised concerns that the existing regulations implied that a notification of a temporary suspension of redemptions in a UCITS was required after 21 working days irrespective of whether the UCITS has already notified the Central Bank of the suspension lifting. The CBI UCITS Regulations clarify that the notification is only required where the suspension remains in effect. This notification should be provided after 21 working days and for each subsequent period of 21 working days while the suspension remains in effect.
Designated Email Address
The requirement introduced under the Central Bank's fund management company guidance that all UCITS maintain an email address for correspondence with the Central Bank which is monitored daily has now been codified into legislation for UCITS under the CBI UCITS Regulations.