On 11 July 2013, the European Securities and Markets Authority (“ESMA”) published an updated questions and answers paper (the “Updated Q&A”) on its guidelines on exchange traded funds (“ETFs”) and other issues relating to UCITS.

The Updated Q&A has added additional questions to the following sections:

  1. Information to be inserted into the prospectus

This section has been updated with a question to confirm that the provisions applicable to index-tracking UCITS also apply to those categorised as ETFs.

  1. Secondary market

This section has been updated with a Q&A to confirm that UCITS management companies are not required to contact secondary market investors of a UCITS ETF where direct redemptions are possible. Rather, UCITS management companies are required to ensure that the appropriate processes are in place to allow direct redemptions when requested.

  1. Financial derivative instruments

ESMA has updated this section to confirm that a counterparty to a financial derivative instrument (FDI) can be considered to have discretion over the composition of the underlying FDI where it has the power to decide on the composition of the underlying FDI or the UCITS investment portfolio without the prior consent of the UCITS management company.

In addition, this section also confirms that a counterparty will not be deemed to have discretion over the composition of the underlying FDI where it might offer advice on the composition of the underlying FDI or the UCITS investment portfolio but the ultimate investment decision is approved by the UCITS management company.

Some minor modifications have also been made to some of the pre-existing answers provided in this section.

  1. Collateral management

An additional question has been included in this section to confirm that where there is title transfer and the provider is also the depositary of the UCITS, the collateral should still be held by the depositary. However, it is stated that the depositary should have ensured the separation of the performance of its depositary duties from its role as the provider of collateral to the UCITS. This will ensure that potential conflicts of interest are avoided.

  1. Financial indices

The Updated Q&A now confirms in this section that financial indices of indices are permitted for investment purposes and that underlying financial indices do not need to satisfy the requirements on diversification laid down in the Eligible Assets Directive.

This section also confirms that a UCITS can invest in financial indices the valuation of which is carried out by the index provider itself. This is on the condition that the unit within the index provider with responsibility for the valuation of the index is independent from the unit that designs the index.

Some minor modifications have also been made to some of the pre-existing answers provided in this section.