On 30 January 2012, the European Securities and Markets Authority ("ESMA") published a consultation paper setting out future guidelines on UCITS exchange traded funds ("ETFs") and other UCITS-related issues. The consultation paper follows an earlier discussion paper issued by ESMA in July 2011 which set out its policy orientations on guidelines for UCITS ETFs and Structured UCITS (see our earlier updates on the discussion paper generally and on the structured UCITS proposals specifically).
The proposals in the consultation paper detail future provisions relating to:
- UCITS ETFs (physical and synthetic);
- index-tracking UCITS;
- efficient portfolio management techniques;
- total return swaps; and
- strategy indices for UCITS.
The guidelines in relation to ETFs include a definition of UCITS ETFs and the use of an identifier for such funds, disclosure requirements for actively-managed ETFs and rules for protecting investors dealing on secondary markets. Helpfully, the draft guidelines do not propose to classify synthetic ETFs as "complex" products, as had been suggested in the policy orientations issued in June 2011. The current MiFID framework treats all UCITS as automatically non-complex instruments and therefore does not require UCITS to satisfy the appropriateness test, which requires an assessment of whether a potential investor has the necessary knowledge to understand the investment.
The primary focus of the draft guidelines is on disclosure requirements in the interests of investor protection. For example, the consultation paper includes draft guidelines on the disclosure required in the prospectus and annual and half-yearly reports of index-tracking UCITS, and the disclosure required in the prospectus and Key Investor Information Document ("KIID") of index-tracking leveraged UCITS.
Overall, the initial reaction to the consultation paper is that it appears more balanced than many had feared. While certain items, such as the definition of ETFs and the additional obligations regarding collateral where UCITS use total return swaps, are likely to be the topic of much discussion and further submissions, some of the important issues contained in earlier submissions from industry participants appear to have been taken on board by ESMA.
The consultation paper is available here. The closing date for comments is 30 March 2012.
We will provide a more detailed commentary on the proposed guidelines once we have had an opportunity to consider the consultation paper in full.
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