Publication Of Q&A In Respect Of ESMA Guidelines On ETFs And Other UCITS Issues

Author:Mr Kevin Murphy, Sarah Cunniff and Dara Harrington
Profession:Arthur Cox

On 15 March 2013, the European Securities and Markets Authority ("ESMA") published a questions and answers document (the "March Q&A") in relation to the guidelines that were published by ESMA on 18 December 2012 on exchange-traded funds and other UCITS issues (the "ESMA Guidelines"). We published a client briefing which discussed the issues raised in the ESMA Guidelines which can be found here. The March Q&A has now been updated to provide further clarification on certain sections of the ESMA Guidelines. The March Q&A was updated on 11 July 2013 (the "July Q&A") and the purpose of this briefing is to summarise the changes made in the July Q&A.

Index-tracking UCITS and index-tracking leveraged UCITS

The July Q&A clarifies that the provisions in the ESMA Guidelines relating to index-tracking UCITS will also apply to a UCITS ETF if it tracks an index or indices and not just to index-tracking UCITS.

Secondary Market

The ESMA Guidelines provide that secondary market investors must have a limited right to sell shares directly back to a UCITS ETF. The July Q&A clarifies that UCITS management companies are not required to be directly in contact with secondary market investors as they do not typically have a direct relationship with these investors. However, UCITS management companies should make sure that appropriate processes are in place in order to allow direct redemptions when needed. In this context, the reference to "unitholders" under Article 92 of the UCITS Directive1 should be understood as including secondary market investors of UCITS ETFs.

Financial derivative instruments ("FDI")

The July Q&A clarifies that where a UCITS enters into an unfunded swap (whereby it swaps the performance of its assets against the performance of another portfolio of assets), the UCITS should not combine both sets of assets (those swapped out and those swapped into the UCITS) when assessing the investment limits laid down in Articles 52 to 56 of the UCITS Directive (the "Investment Limits"). This is because the UCITS' ultimate exposure is not a combination of the two portfolios of assets. However, both portfolios of assets in such an unfunded swap must comply with these Investment Limits.

The July Q&A clarifies that total return swaps should be treated like any other FDI and so the UCITS portfolio and the exposure resulting from the use of the FDI should comply with the Investment Limits.

The July Q&A clarifies that in situations where a counterparty to a FDI...

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