Documenting Derivatives With Irish Regulated Funds

Author:Ms Kathleen Garrett and Dara Harrington
Profession:Arthur Cox
 
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Categories of Funds in Ireland

There are two broad categories of regulated investment funds in Ireland:

  1. undertakings for collective investment in transferable securities ("UCITS") established pursuant to regulations implementing the European Union's ("EU") UCITS Directive; and

  2. collective investment schemes other than UCITS ("non-UCITS").

    Either category of funds may be established as a single fund or as an umbrella fund comprising one or more sub-funds, each of which may have a different investment objective and policies.

    UCITS

    The principal benefit of a UCITS classification is that the fund may be offered to the public throughout the EU subject to compliance with the cross-border notification procedures specified by the UCITS Directive (the "UCITS passport"). UCITS may be offered to both institutional and retail investors. Due to the potential for distribution to retail investors throughout the EU, UCITS are subject to an EU-wide regulatory regime in terms of eligible investments and diversification requirements. From a regulatory perspective, UCITS funds may invest in financial derivative instruments (exchange traded or over-the-counter ("OTC")) for investment purposes as well as for efficient portfolio management ("EPM") purposes subject to certain conditions including:

    (i) the reference item or index to which the derivative relates must be an eligible asset and must come within its investment objectives;

    (ii) the counterparties are regulated institutions of a type approved by the Central Bank;

    (iii) the derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time and for fair value; and

    (iv) compliance with the global exposure, counterparty exposure and cover requirements prescribed by the Central Bank's UCITS Notices and the derivatives risk management process adopted in respect of the UCITS.

    Non-UCITS

    A non-UCITS fund does not have the benefit of the UCITS passport and so the marketing of a non-UCITS fund is subject to the relevant domestic law of each country into which it is marketed. However, the Central Bank's non- UCITS regime imposes varying subscription, investment and borrowing restrictions depending on whether the fund is established for retail investors, professional investors ("PIF") or qualifying investors ("QIF"):

    Retail

    No minimum subscription requirement.

    PIF

    Minimum initial subscription requirement of €100,000.00. Derogations from the investment restrictions applicable to retail non-UCITS are possible on a case by case basis from the Central Bank.

    QIF

  3. QIFs are for qualifying investors, typically institutional investors or sophisticated high net worth individuals in one of the following categories:

    (i) an investor who is a professional client within the meaning of...

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