1. INTRODUCTION
Ireland is internationally recognised as one of the world's most advantageous jurisdictions in which to establish international investment funds. Investment funds often use derivatives for efficient portfolio management and investment purposes. However, as regulated entities, there are myriad legal, regulatory, technical and commercial considerations that should be reflected in the trading documents to ensure that they remain legally enforceable and to protect the commercial interest of the parties.
The specific regulations applied by the Central Bank of Ireland (the "Central Bank") to an investment fund will depend on the type of investors to whom the fund is to be sold and its specific investment policies. The regulatory framework in Ireland is divided between Undertakings for Collective Investment in Transferable Securities ("UCITS") and Alternative Investment Funds ("AIFs"), both of which are governed by European and Irish legislation as well as the rules and guidance issued by the Central Bank. The primary difference in the regulation of each relates to the nature of investments which they are permitted to make, and to the particular investment rules and borrowing restrictions imposed by the Central Bank. UCITS are a form or retail or mutual fund while AIFs are restricted to sophisticated investors.
2. WHAT IS A UCITS?
UCITS are diversified, limited leverage, open ended investment funds whose object must be to invest capital raised from the public in transferable securities and other liquid asset classes. UCITS are open ended insofar as investors must generally be entitled to redeem their shares or units on request at least twice per month at regular intervals. There are restrictions on UCITS' investment and borrowing policies and on their use of leverage and financial derivative instruments.
The advantage of establishing a fund as a UCITS is that it can generally be sold without any material restriction to any category or number of investors in any EU Member State, subject to the filing of appropriate documentation with the relevant regulatory authority in those EU Member States. The UCITS brand has gained global recognition, with UCITS regarded as well-regulated funds with robust risk management procedures and a strong focus on investor protection. UCITS are widely accepted for sale in Asia, the Middle East, and Latin America.
The criteria used to determine eligible investments for UCITS are set out in detail in the Eligible Assets Directive.1 In summary, a UCITS must invest at least 90% of its assets in transferable securities or liquid financial assets listed or traded on recognised exchanges or markets. These include exchange traded or OTC financial derivative instruments. When first introduced, UCITS were only permitted to use derivatives for efficient portfolio management (i.e. hedging) purposes, but since 2003 they have been permitted to use derivatives for investment purposes as well.
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Footnote
1. Commission Directive 2007/16/EC implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions.
Originally published by The Futures And Derivatives Law Report, June 2021.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.