Following the recent downgrading of credit ratings for a number of financial institutions by Moody's Investor Services, the Central Bank of Ireland (the "Central Bank") has clarified its position regarding breaches of its minimum credit ratings requirements for prime brokers and other counterparties.
Guidance Note 2/11 "Professional collective investment schemes: Appointment of prime brokers and related issues" (the "Guidance Note") provides that a prime broker, or its parent company, must have a minimum credit rating of A-1 (from Standard and Poor's) or equivalent. In the event of a downgrade of a prime broker to A-2 or equivalent (but not lower), the Central Bank has indicated that it will permit the relationship with the prime broker to remain in place where net exposure of the fund to the prime broker is less than 40% of net asset value (or 20% / 30% in the event that the fund is a professional investor fund). This requirement will apply in addition to any existing contractual limits on re-hypothecation of fund assets by the prime broker.
Other OTC counterparties
The Guidance Note also provides that a non-UCITS fund may enter into collateral arrangements with OTC counterparties whereby assets of the fund are passed outside of the control of the trustee / custodian where such assets may be pledged, lent or re-hypothecated by the counterparty. Any such counterparty must have...