On 9 July 2012, the European Securities and Markets Authority ("ESMA") published a Questions and Answers paper (the "Q&A") on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS.
ESMA confirmed that UCITS which use Value at Risk methodology ("VaR") to calculate global exposure are required to make a disclosure as to leverage. It has been clarified that calculation of global exposure cannot be made on a net basis (after netting / hedging arrangements are taken into account). Leverage should instead be calculated as the sum of the notionals of the derivatives used. Disclosure of leverage can also be based on the Commitment Approach.
Further to the ESMA Q&A and following feedback from the Industry, The Central Bank of Ireland (the "Central Bank") has clarified its leverage rules for UCITS using VaR to calculate global exposure.
The Central Bank welcomed the publication of the Q&A as it will ensure a harmonised approach throughout the EU and confirms that UCITS using VaR to calculate global exposure must make the prospectus disclosure as to leverage, either using the sum of the notionals approach, or both the Commitment Approach and the sum of the notionals.
Furthermore, the Central Bank addressed the recent imposition of a minimum subscription amount and a restriction on leverage limits for Irish authorised UCITS and confirms that these will no longer be imposed.
What this means for you
The publication of the ESMA Q&A ensures a harmonised approach will be adopted and the Central Bank guidance further clarifies the leverage rules for UCITS using VaR to calculate global exposure. Funds should ensure that their disclosures reflect the clarified rules and where a minimum subscription was adopted this may be removed if preferred.
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.
