UCITS (Undertaking for Investment in Transferable Securities) is
the European harmonized fund product which can be sold on a cross
boarder basis within the European Union
("EU") based on its authorization in one
EU member state. Ireland was one of the first EU member states to
transpose the first EU UCITS Directive into Irish law when it did
so in 1989. Ireland is now one of the leading domiciles for UCITS
funds which are frequently promoted by US asset manager and
marketed not just in Europe but globally.
The first EU UCITS Directive allowed for a very basic product
which was permitted to invest in transferable securities and only
use derivatives for the purpose of efficient portfolio management.
Accordingly, under the original UCITS regime, UCITS were
essentially long only equity or bond funds. Nevertheless, it proved
to be a very successful product in this section of the market and
established a strong global brand as a regulated investment
product. In the period since the first UCITS Directive, there has
been significant amending legislation and regulations permitting
UCITS to offer a far broader range of investment strategies while
still maintaining its global brand as a regulated investment
product which enables UCITS to be sold not just in Europe but also
in other significant markets such as Asia and South America.
EU Directive 2001/108 (which is commonly referred to as the
"Product Directive") introduced
significant developments to the UCITS product. It broadened the
range of assets in which a UCITS may invest and the investment
strategies which it may pursue. The Product Directive expanded the
types of instruments in which a UCITS may invest to include money
market instruments, other funds (both UCITS and Non-UCITS) and bank
deposits. It also permits the establishment of index tracking funds
and the use of financial derivative instruments for investment
purposes rather than merely for efficient portfolio management.
In accordance with the Product Directive, a UCITS' maximum
potential exposure relating to derivative instruments should not
exceed its total net asset value. The EU Commission has recommended
that a UCITS which uses financial derivatives instruments in a
nonsophisticated manner (i.e. only use a limited number of simple
derivative instruments for non-complex hedging or investment
strategies) may use either, (i) a commitment approach (where the
derivative positions of the UCITS are converted into the equivalent
position in the underlying assets relating to the derivatives,
which may be netted) or (ii) an advanced risk management approach
such as Value-at-Risk ("VaR") to measure
its potential exposure through the use of derivatives.
A UCITS which is a sophisticated user of derivatives must use...