As outlined in our recent Front Page news bulletin ESMA has decided to revise its rules and allow UCITS to accept up to 100% of non-cash collateral in the form of transferable securities or money market instruments issued or guaranteed by a Member State, one or more of its local authorities, third countries or certain public international bodies. Previously the ESMA guidelines provided that no more than 20% of a UCITS fund's net asset value (NAV) could be received in collateral exposed to any issuer (including Member States, one or more of its local authorities, third countries or certain public international bodies).

This relates to collateral received in the context of OTC derivative transactions and EPM techniques, such as repurchase/ reverse repurchase and stock-lending transactions. Use of this relaxed approach will be subject to additional disclosures and will require diversification across at least 6 different issues (with no one issue accounting for more than 30% of the UCITS fund's NAV).

Less helpfully, ESMA has clarified its disclosure requirements for UCITS using financial indices, which will make it more difficult for index providers to preclude competitors from accessing full calculation methodology.