Policy Change Highlights
Financial Regulator issued a revised policy note on October 5, 2007 in relation
to physical short selling by UCITS.
this revised policy, UCITS will now be permitted to engage in covered
physical short sales where the cover is provided through stock borrowing.†
Additional rules apply as set out below. Going forward, this will mean that
UCITS will be able to pursue long/short strategies without being limited to synthetic
replication through derivatives.
of particular relevance for 130/30 type funds (see further below), this revised
policy has broad application for UCITS wishing to short sell.
Background to Policy
to the release of this revised policy note, UCITS were not permitted to engage
in physical short selling but were able to pursue synthetic shorting strategies
by taking short positions through the use of derivatives, subject to the
overriding requirement that global exposure did not exceed 100% of net assets.
that global exposure limit remains, the new policy reflects what is happening
in the market place and the market's understanding of what constitutes ìcoverî
and is clearly a welcome development.
key point is the acceptance of a distinction between covered and uncovered
position in relation to uncovered short sales remains - they are prohibited
under Regulation 72 the UCITS Regulations1.
The Revised Policy
revised policy now provides that where stock is borrowed before entering into a
physical short sale of that stock, the stock borrowing arrangement will be
considered to constitute cover for the short sale.
new policy is subject to the following parameters:
sales are covered through a stock borrowing at the outset, in
accordance with the UCITS Regulations.
stock borrowing arrangement must be in accordance with the CESR guidelines
and the assets used by the fund to support the stock borrowing cannot be
passed to the stocklender (although a charge over such assets may be given
by the fund's trustee/custodian).
leverage limits are not exceeded
strategy is adequately disclosed in the fund's prospectus and risk
The prospectus must
disclose a clear description of the covered short sale strategy. A risk
factor must outline the unlimited risk of an increase in the market price
of the security that is the subject of the short position.
The prospectus must
contain an indication of the expected level of...