The ESMA Guidelines on ETFs and other UCITS Issues have now been published and will become effective on 18 February 2013 with a grandfathering period of 12 months. 

The Guidelines apply to relevant Member State regulators and to “financial market participants” (including UCITS and their management companies) who must “make every effort” to comply with them from this date.  While ESMA will be issuing a Q&A document in March 2013 which will clarify certain requirements surrounding the Guidelines, new UCITS established on or after 18 February 2013 will immediately be subject to the Guidelines.

The Guidelines:

  • Indicate the information that should be communicated to shareholders (either in the prospectus or financial reports) of index-tracking (or index-replicating) UCITS (whether established as ETFs or not)
  • Establish the criteria against which a “financial index” should be benchmarked in order for the index itself to constitute a UCITS-eligible asset
  • Set out the requirements on collateral management, risk management and disclosure for UCITS using EPM techniques (such as securities lending and repos) and OTC derivative transactions

The transitional provisions:

  • Require a UCITS which invests in financial indices that do not comply with the Guidelines to align its investments within the grandfathering period
  • Enable an existing ETF to postpone compliance with the requirements relating to identifiers until the earlier of a change to the fund name or expiry of the grandfathering period
  • Require an existing ETF to comply with the provisions related to the treatment of secondary market investors from 18 February 2013
  • Enable an existing structured UCITS (provided it does not accept new subscriptions after 18 February 2013) not to comply with the Guidelines. However, it can still actively manage its financial contracts for investor payoff purposes
  • Require an existing UCITS to align its portfolio of collateral with the Guidelines within the grandfathering period (with the proviso that after 18 February 2013 reinvested cash collateral must comply with the Guidelines)
  • Require disclosure in the prospectus of revenue-sharing arrangements on expiry of the grandfathering period

There are certain triggers which will require implementation of the Guidelines prior to expiry of the grandfathering period. These include any amendment to a UCITS’ articles of association or trust deed, prospectus, KIID or marketing materials on or after 18 February 2013. Requirements relating to disclosures in the report and accounts of an existing UCITS do not apply in respect of any accounting period that ended before 18 February 2013.