Sufficient collateralisation


On May 1 2013 the Regulation on Securities Lending and Repurchase Transactions issued by the Financial Market Authority entered into force (save for the provisions on securities lending systems, which will enter into force on January 1 2014). This regulation contains specific limitations for management companies under the Investment Fund Act 2011 entering into securities lending or repurchase transactions on behalf of Austrian undertakings for collective investment in transferable securities (UCITS). The regulation also takes into account the European Securities and Markets Authority (ESMA) guidelines on exchange-traded funds and other UCITS issues issued on July 25 2012.


As a general guideline, the regulation sets out that securities lending and repo transactions may be entered into by a management company on behalf of UCITS only if:

  • regard is given to the best interests of the unit holders of the UCITS;
  • such transactions do not result in a change in the UCITS' investment strategy; and
  • there is no material change in the risk profile of the UCITS.

The regulation also contains specific requirements for implementing the ESMA guidelines. For example, securities lending and repo transactions must have a maximum term of 12 months. Revenues of such transactions (exclusive of direct costs and fees paid) must be returned by the management company to the UCITS. Fees for such transactions must be on arm's-length terms and the fees must be tested against the market standard at least once a year.

Management companies must have the unconditional right to terminate the securities lending transaction at any time and to request from the borrower that lent securities are returned within a maximum period of three business days following such request.

In case of repo transactions, the management company must be able, at any time, to recall the full amount of cash or to terminate the repo transaction on either an accrued basis or a mark-to-market basis.

Other provisions of the regulation primarily relate to measures to be taken by a management company. For instance, a management company entering into securities lending and repo transactions should take into account these operations when developing the liquidity risk management process, in order to ensure that the redemption obligation with respect to the relevant UCITS is not negatively affected. Furthermore, a management company must inform the unit holders of the UCITS about certain characteristics of the securities lending and repo transactions and include details of the transactions in the UCITS' annual report.

Sufficient collateralisation

Securities lending by the management company of securities belonging to UCITS' portfolio is permissible only if sufficient collateral is posted by the counterparty when administrating the UCITS. Such collateral must satisfy the conditions stipulated in the regulation. These conditions include:

  • daily valuations of the collateral;
  • non-cash collateral only from issuers with high credit standing;
  • sufficient liquidity; and
  • sufficient diversification of the collateral.

In case of a title transfer financial collateral arrangement, the collateral must be kept with the depositary of the UCITS. For other types of collateral arrangement, the collateral can be held by a third-party custodian, provided that it is subject to prudential supervision and unrelated to the provider of the collateral.

Collateral received should be capable of being fully enforced by the UCITS immediately without reference to or approval from the counterparty. Non-cash collateral may not be re-invested and cash collateral may be reinvested only in accordance with the regulation.

A management company must have in place a clear 'haircut' policy for the UCITS and each class of assets received as collateral. This policy should take into account the characteristics of the assets, such as the credit standing or the price volatility, as well as the outcome of the stress tests performed.


The regulation does not detail the consequences of a breach of the obligations. The Investment Fund Act 2011 contains a provision (Section 79(2)) that states that a breach of the investment limits set out in Sections 66 to 78 of the act does not affect the validity of a transaction, but the regulation is missing a corresponding rule. In contrast, Section 81 of the act contains certain restrictions for the management company when providing assets of UCITS as collateral to a counterparty of the UCITS. In this context, the law states that disposals in violation of the act are invalid with respect to the unit holders of the UCITS (ie, would constitute only obligations of the management company itself, rather than of the UCITS).

In this context, Austrian legal writing generally holds that transactions between a management company on behalf of the UCITS' unit holders and a counterparty will be invalid if the management company was knowingly disposing of the UCITS' assets against a certain restriction relating to such disposal and the counterparty knew or should have known. If this view is followed, it cannot be excluded that securities lending or repo transactions (which arguably consist also of a disposal of UCITS' assets) might be held to be invalid if they do not take into account the rules as set out by the regulation. Such invalidity could potentially in turn affect, for example, close-out netting if such invalid transactions were to be included in the process.


Generally, the regulation will apply as of May 1 2013 to securities lending and repo transactions concluded as of this date. However, management companies that had already entered into securities lending or repo transactions for UCITS before May 1 2013 must ensure compliance with the provisions on collateral as at February 18 2013 at the latest.

While some of the rules set out by the regulation will affect only the management companies (eg, including the transactions within the UCITS' risk management or providing sufficient information to investors or unit holders of the UCITS), others will also be relevant for counterparties of Austrian UCITS.

Therefore, management companies and their counterparties are well advised to consider either amending existing (framework) agreements to reflect the new requirements under the regulation, or providing otherwise (eg, in the respective confirmations for securities lending or repo transactions) for compliance with the regulation.

For further information on this topic please contact Stefan Paulmayer at Schoenherr by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email (

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