On 18 December 2012, the European Securities and Markets Regulatory Authority (“ESMA”) published its consolidated guidelines on ETFs and other UCITS issues (the “Guidelines”) for competent authorities and UCITS management companies. The significance of this publication date is that it triggers a two month period, upon the expiration of which the Guidelines will come into force.  As such, the Guidelines are applicable from 18 February 2013 (the “Application Date”).

Background

These Guidelines consolidate the guidance in ESMA's existing reports on ETFs and other UCITS issues and on repo and reverse repo agreements which were published in July and early December 2012 respectively. UCITS and UCITS management companies will already be familiar therefore with the content of the consolidated Guidelines, which include the use of an identifier for UCITS ETFs; the treatment of secondary market investors of UCITS ETFs; UCITS’ use of efficient portfolio management (“EPM”) techniques and revenue arising in connection with such transactions; collateral management rules for OTC financial derivative transactions and securities lending arrangements; disclosure provisions regarding tracking error for index-tracking UCITS; financial indices eligible for UCITS investment; and requirements relating to swap-based UCITS. The Guidelines also incorporate repo and reverse repo provisions which require that a UCITS must be able to recall the securities and cash under repo and reverse repo arrangements respectively at any time, or to terminate the relevant agreement. Fixed term repo and reverse repo agreements that do not exceed seven days are regarded as arrangements allowing assets to be recalled at any time by the UCITS.

Next steps

UCITS established after the Application Date are required to comply immediately with the new requirements within the Guidelines. With respect to existing UCITS, there are a number of grandfathering provisions which apply in specific cases. These are summarised below and we would be happy to discuss these with you in terms of their application and timing.

  • UCITS that exist before the Application Date (“Existing UCITS”) with revenue sharing arrangements relating to EPM must comply with the new disclosure rules within 12 months of the Application Date.
  • Existing UCITS that invest in financial indices and which do not comply with the Guidelines should align their investments with the Guidelines within 12 months of the Application Date.
  • Structured UCITS (with a pre-determined maturity date) in existence before the Application Date are not required to comply with the Guidelines provided they do not accept any new subscriptions after the Application Date.
  • Existing UCITS are required to align their collateral portfolio with the Guidelines within 12 months of the Application Date.  Any reinvestment of cash collateral after the Application Date must comply with the Guidelines immediately.
  • Existing UCITS ETFs must comply with the Guidelines relating to identifiers on the first occasion after the Application Date on which the name of the fund is changed for another reason, or 12 months after the Application Date, whichever date is earliest.
  • Existing UCITS ETFs should comply with the provisions relating to the treatment of secondary market investors from the Application Date.
  • Requirements in respect of the contents of fund rules, instruments of incorporation, prospectus, KIID or marketing materials that issued prior to the Application Date do not come into effect until the first occasion after the Application Date on which the relevant document (having been revised or replaced for another purpose) is published, or 12 months after the Application Date, whichever date is earliest.
  • Requirements to publish information in the annual report do not apply in respect of any accounting period that has ended before the Application Date.

ESMA Q & A

We understand that ESMA intends to publish a questions and answers document with respect to the Guidelines, currently estimated for late first quarter of 2013.

If you wish to access a copy of ESMA’s Guidelines, please click through the following link: ESMA Guidelines on ETFs and other UCITS issues.