Funds Quarterly Legal And Regulatory Update 1 October 2018 – 31 December 2018

Author:Dillon Eustace
Profession:Dillon Eustace
 
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UNDERTAKINGS IN COLLECTIVE INVESTMENTS AND TRANSFERABLE SECURITIES ("UCITS")

(i) Central Bank letter to Irish Funds on authorisation procedures relating to UCITS and AIFs

On 8 October 2018, the Central Bank published revised guidance (the "Guidance") on the use of financial indices by UCITS. The purpose of the Guidance is to clarify the Central Bank's requirements where a UCITS intends to use a financial index for investment or efficient portfolio management purposes.

In particular, the Central Bank has introduced a new certification regime for UCITS funds under which the responsible person must certify in writing to the Central Bank prior to gaining exposure to a financial index that the relevant index complies with the requirements of the UCITS Regulations, the CBI UCITS Regulations and the Guidance.

The Central Bank has confirmed that a submission is required where the UCITS fund intends to replicate or track the composition of the relevant financial index. It has also advised that such a submission is also required where a UCITS intends to gain exposure to the relevant financial index for either investment purposes or efficient portfolio management purposes.

Consequently any UCITS which intends to gain exposure to an index which contains a constituent which represents more than 20% of that index (up to a maximum of 35% of the relevant index) must make a submission to the Central Bank prior to gaining exposure to the relevant index setting out why the exposure of up to 35% for a single issuer is justified by exceptional market conditions.

The Central Bank has stated that it is only possible for a UCITS to gain exposure to an index which is comprised of derivatives on commodities, notwithstanding the generic reference to "commodity indices" in Regulation 9 of the CBI UCITS Regulations.

The Central Bank has also confirmed that the disclosure obligations set down in Regulation 54(2) of the CBI UCITS Regulations only apply in the case of an index replicating UCITS fund which intends to avail of the increased diversification limits set down in Regulation 71 of the UCITS Regulations.

UCITS will now need to ensure that, prior to gaining exposure to a financial index for investment or efficient portfolio management purposes:

The responsible person can confirm to the Central Bank that the relevant index is eligible for use by the UCITS, taking into account the specific criteria identified in the Guidance; and The responsible person will be in a...

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