Prior to the issue of the Guidance, the CBI required that indices used by UCITS funds be submitted for CBI review where an index comprised of corporate issuers exceeded the usual UCITS concentration limits or where the index was comprised of ineligible assets, i.e. assets in which a UCITS cannot invest in directly, such as commodity futures.

The CBI review process involved the submission to the CBI of the index factsheet, methodology, list of constituents and their weightings as well as a completed checklist against the CBI index requirements.

A confirmation to the CBI of compliance of the index with the CBI requirements had to be submitted as part of the submission and also in instances where the submission was not required.

The New Index Certification Process

The Guidance has introduced a self-certification regime for UCITS proposing to use an index. As before, the CBI requires a confirmation of compliance of the index with the CBI requirements. As part of the new certification process, this confirmation must now be provided by a director on behalf the UCITS management company.

The CBI has also simplified the requirement for a submission in circumstances where the weighting of a single corporate issuer in an index makes up more than 20% and up to 35% of the index. This would arise in the context of indices comprised of corporate issuers whereby the usual UCITS "5/10/40" concentration limit for corporate issuers (i.e. the exposure to the same issuer cannot be more than 10% and the sum of constituents with a weighting in excess of 5% cannot be more than 40%) is exceeded. In these circumstances, the index could avail of the increased "20/35" concentration limit envisaged by the UCITS rules (i.e. exposure to the same issuer cannot be more than 20% and exposure to one issuer may be raised to 35% where this is justified by exceptional market conditions). Under the Guidance, the index submission in respect of "20/35" indices is now limited to setting out why the market conditions justify increasing the concentration limit for investment in a single issuer to 35%. The index due diligence documentation is no longer required to be provided to the CBI as part of the submission.

Index Quality Assessments

The CBI expectations as to the information that a UCITS manager must maintain in respect of indices used by the UCITS under its management are set out in the Guidance for the first time. It is made clear in the Guidance that the CBI expects a UCITS manager to be in a position to demonstrate at all times that indices used by the UCITS under its management comply with the regulatory requirements. It is envisaged that the CBI would carry out spot checks and the Guidance sets out the following minimum information that must be provided to the CBI upon request:

  • the rationale as to how the index achieves the objective of being a benchmark for the market to which it refers
  • the methodology used to construct the index (which should be adequately described and include data on constituent selection criteria, constituent price collection procedures, asset allocation rules and guidelines for altering and re-balancing the index)
  • information on index constituents and their current as well as historic weights
  • details as to how the index calculation methodology is verified
  • information should be provided on any fees embedded in the index
  • any technical and marketing documents produced by the index sponsor

Summary and Action Required

Notwithstanding the simplification that the new certification regime brings, UCITS managers are likely to find that not a whole lot has changed as far as the CBI review process is concerned. In summary, index submissions have been done away with for indices comprised of ineligible assets and have been simplified for indices that rely on the increased "20/35" issuer concentration limits. A confirmation in respect of index compliance (now in the form of a certification from the management company) still has to be given for every index. The level of due diligence that UCITS managers have to carry out pursuant to the UCITS requirements on the indices they use has also not changed.

Arguably of greater note is that the CBI has formally set out its expectations as to the level of information it expects to receive at short notice from a UCITS manager in relation to the indices used by the UCITS under its management. It is now timely for UCITS managers to review the index due diligence documentation maintained by them against the CBI requirements and ensure that it is in the form that could be provided to the CBI at short notice upon request.