UCITS, Non-UCITS & Hedge Funds
(i) UCITS Self Managed Investment Companies
The Central Bank of Ireland (the "Central Bank") has recently clarified that the UCITS IV requirements will apply to UCITS self-managed investment companies (SMICs) from 1 July 2013. The business plan of each SMIC must reflect these requirements by 1 July 2013. Accordingly, each UCITS SMIC is required to submit a business plan to the Central Bank so that the Central Bank can assess if the UCITS SMIC is UCITS IV compliant by 1 July 2013. The business plans can be submitted and agreed but (at the SMIC's discretion) may not become effective until 1 July 2013. The Central Bank has set out a staggered timeline for submission of the business plans in order to evenly distribute the review process. For currently authorised UCITS SMICs the Central Bank has notified the relevant legal advisors of the scheduled submission dates.
(ii) ESMA Consultation on guidelines on ETFs and other UCITS issues
On 30 January 2012 the European Securities and Markets Authority ("ESMA") published a consultation paper on guidelines on ETFs and other UCITS related issues, (the "Consultation Paper"). This paper follows on from the Discussion Paper on UCITS ETFs and Structured UCITS last year and covers the following areas:
UCITS Exchange-Traded Funds
The Consultation Paper defines a UCITS ETF as "a UCITS fund with at least one unit or share class which is continuously tradable on at least one regulated market or multilateral trading facility with at least one market maker which takes action to ensure the stock exchange of its units or shares does not significantly vary from its net asset value."
The Consultation Paper highlights that UCITS funds meeting this definition would be obliged to use the identifier "ETF" in its name and, conversely, UCITS funds which do not meet this definition will not be entitled to use the "ETF" identifier in its name or in its fund rules, prospectus, KIID or other relevant fund documentation.
The Consultation Paper sets out additional disclosure requirements for actively-managed UCITS ETFs focusing in particular on the fact that they are not index trackers.
Efficient portfolio management techniques
This area of the Consultation Paper has the potential to impact all UCITS funds and not just ETFs. It calls for much more restrictive rules as regards collateral and the diversification of collateral received by a UCITS fund (not just ETFs) which engages in stocklending, repos or other similar transactions.
The Consultation Paper also proposes certain transitional provisions which will ease the immediate impact that the new rules will have.
ESMA tried to restrict the use of such indices by calling for significantly enhanced disclosure including disclosure of the full calculation methodology, the constituents of the index, and their respective weighting. Another point made by ESMA is that strategy indices which involve proprietary information that the index providers are unwilling to disclose, would not be considered as an eligible financial index in the future. This would have an important bearing on certain index providers and managers although greater clarity will have to be secured prior to finalising these guidelines as to when an index is actually attempting to replicate a quantitative strategy or a trading strategy and when they will come within the new requirements.
The Consultation Paper sets out proposals for additional disclosures that would have to be made in the prospectus of an index-tracking UCITS including details of its underlying components (e.g. could be done by means of reference to a website), how the index will be tracked and the risk implications arising from this (e.g. counterparty exposure). The prospectus will also need to include the fund's policy regarding tracking error, a description of factors that are likely to affect the fund's ability to track the performance of the index and details of whether the fund will have a full-replication or sampling methodology.
Index-tracking leveraged UCITS
The Consultation Paper calls for more disclosure as regards leverage policy and the impact of it on risks and costs in the prospectus and in the KIID.
Total Return Swaps ("TRS's)
The proposals contained in the Consultation Paper could potentially apply to any UCITS fund that uses TRS's. The Consultation Paper proposes to apply the UCITS diversification rules to collateral received from a counterparty, this means that a UCITS fund would need to ensure that the UCITS diversification rules were not breached when collateral was added to existing investments held by the UCITS fund. The Consultation Paper also proposes to introduce significant disclosures for the prospectus and annual report of any fund which engages in TRS's.
Any managers managing a UCITS platform should be aware of the consultation paper, which may be found at the following address: http://www.esma.europa.eu/system/files/2012- 44_0.pdf
Another point which managers should note is that these regulatory amendments are not confined to the EU. The International...