(I) UCITS SELF-MANAGED INVESTMENT COMPANIES
Background
On 30 November, 2012 the Central Bank of Ireland (the "Central Bank") announced that it will begin accepting submissions of the revised Directive 2009/65/EC ("UCITS IV") compliant business plans for self-managed investment companies ("SMICs") in three separate tranches in 2013.
The three tranches are: 31 January 2013, 31 March 2013 and 31 May 2013. The Central Bank has asked the law firms acting for the SMICs to split their SMIC client list over the three tranches so as to avoid a situation whereby the vast majority of the SMIC applications are not left until 31 May 2013. All new SMIC applications from 1 January 2013 will be required to comply in full with the UCITS IV requirements.
UCITS IV Requirements for SMICs
In terms of what SMICs can be expected to have to comply with under UCITS IV and document accordingly in their business plans, the Central Bank has previously clarified in a letter to the industry on 10 August, 2012 that both UCITS management companies and SMICs should be subject to the same basic regime under UCITS IV bearing in mind the 'nature, scale and complexity' of the SMIC.
At a high level, we can take from this that while all of the requirements of UCITS IV should apply to SMICs, on the basis that most are less complex than UCITS management companies, the implementation of the full requirements should be considered in light of the 'nature, scale and complexity' of the SMICs and any decision not to implement any of the requirements must be capable of justification on that basis. In addition, it is worth noting that the Central Bank has advised that the requirement to have a permanent compliance function and a permanent internal audit function will not apply to SMICs.
The Central Bank has confirmed that a revised version of the UCITS management company application form (which also applies to SMIC authorisations) containing these updated requirements will be issued by 1 January, 2013.
Filing Process
The submitted business plans will be reviewed by the Central Bank on a spot check basis. While the Central Bank will not issue individual confirmation of receipt for submitted business plans, a list will be issued to the law firm at the end of each tranche noting the revised business plans that have been received. Provided no correspondence has been received by the SMIC (for example with comments arising as a result of a spot check) the Central Bank has stated that the SMIC can assume that their business plans and ancillary documents are in order.
(II) IFIA PUBLISH RESPONSE TO UCITS VI PROPOSALS
On 26 July, 2012 the European Commission (the "Commission") published a consultation paper entitled "Product Rules, Liquidity Management, Depositary, Money Market Funds, Long Term Investments" (the "Consultation Paper"). The Consultation Paper focuses on eight topics under consideration by the Commission and which may form the basis of a UCITS VI. It does not address and is separate to the proposals concerning the UCITS depositary, remuneration and administrative sanctions commonly referred to as UCITS V. The areas considered by UCITS VI mirror those which have been recently considered by ESMA in their guidelines for UCITS ETFs and UCITS generally.
The consultation focuses on eight key topics;
- Eligible assets and use of derivatives: evaluation of the current practices in UCITS portfolio management and assessment of certain fund investment policies, in particular the scope of assets and exposures that are deemed eligible for a UCITS fund;
- Efficient portfolio management techniques: assessment of current rules regarding certain types of techniques and instruments for the purposes of efficient portfolio management;
- Over the counter (OTC) derivatives: treatment of OTC derivatives cleared through central counterparties and assessment of the current framework regarding operational risk and conflicts of interest;
- Extraordinary liquidity management rules: assessment of the potential need for uniform guidance in dealing with liquidity issues;
- Depositary passport: currently there is no European passport for depositaries. The Consultation Paper assesses the possibility of introducing a cross border passport for the performance of the depositary function; 6. Money Market Funds (MMFs): assessment of the potential need to strengthen the resilience of the MMF market in order to prevent investor runs and systemic risks;
- Long term investments: assessment of the potential need for measures to promote long term investments and of the possible form of such measures (including investments in social entrepreneurship); and
- Addressing UCITS IV: the Commission has highlighted a number of areas as part of UCITS IV which need to be examined following the implementation of UCITS IV in July 2011.
The IFIA published its response to the Consultation Paper on 19 October, 2012 which addressed the eight topics listed above. The IFIA's response may be found here: http://www.irishfunds.ie/fs/doc/IFIA_response_to_UCITS_Consultation_Document__18_October_2012_Final.pdf
The Commission published a UCITS VI Roadmap in October, 2012 which provides additional background information to the Consultation Paper. The Roadmap may be viewed here: http://ec.europa.eu/governance/impact/planned_ia/docs/2013_markt_010_revision_of_ucits_en.pdf
(III) ESMA PUBLISH 'GUIDELINES ON EXCHANGE TRADED FUNDS ("ETFS") AND OTHER UCITS ISSUES'
Introduction
On 18 December, 2012 European Securities and Markets Authority ("ESMA") officially published its Guidelines on ETFs and other UCITS issues (the "Guidelines"). This publication marks the beginning of the two month period during which national supervisors have to declare to ESMA their compliance with the Guidelines or explain the reason for non-compliance. The end of this two month period shall be the "Effective Date" from which the Guidelines will apply.
This publication consolidates the Guidelines on ETFs and other UCITS issues (ESMA/2012/474) and the Guidelines on repo and reverse repurchase agreements (ESMA/2012/722), published earlier this year. The Central Bank intends to enforce the Guidelines through amended UCITS Notices which are intended to be issued before the Effective Date.
Some of the provisions of the Guidelines will apply immediately after the Effective Date and some of the provisions will be subject to transitional provisions. Most of the transitional provisions give twelve months from the Effective Date to comply but some of the provisions can apply before then if for example fund documentation is being updated after the Effective Date for other purposes.
The purpose of the Guidelines is to strengthen investor protection by providing guidance on the information which should be communicated with respect to Index-Tracking UCITS and UCITS ETFs together with specific rules to be applied by UCITS when entering into OTC derivative transactions and when applying efficient portfolio management techniques.
ESMA guidelines on repo and reverse repurchase agreements for UCITS funds
ESMA published guidelines on repo and reverse agreements on 4 December, 2012 following a consultation process (the "Repo Guidelines"). As outlined above the Repo Guidelines have been incorporated into the Guidelines. The aim of the Repo Guidelines is to protect investors by introducing requirements on the use of repo and reverse repurchase agreements by UCITS.
The Repo Guidelines provide that a UCITS should enter into repo agreements on terms that allow the UCITS to recall any assets for the full amount of cash at any time. For UCITS entering into reverse repo agreements, the Repo Guidelines leave the possibility for the cash to be recalled on an accrued basis or on a mark-to-market basis. However, if cash is recallable on a mark-to-market basis, the UCITS should value the reverse repo on a mark-to-market basis. Fixed term repo and reverse repurchase agreements that do not exceed seven days should be considered as arrangements on terms that allow the assets to be recalled at any time by the UCITS. This change should enhance the existing UCITS Notice 12 regime for repurchase/reverse repurchase agreements and stock lending and it is anticipated that the UCITS Notices will be updated accordingly in the coming months.
The Repo Guidelines introduce express requirements in relation to recallability, which aim to protect investors by limiting the possibility of repo and repurchase arrangements compromising the ability of a UCITS to meet redemption requests.
The Guidelines may be viewed here; http://www.esma.europa.eu/system/files/esma_en.pdf
(iv) esma opinion on its interpretation of article 50(2)(a) of the ucits directive
On November 20, 2012 ESMA published a formal opinion on its interpretation of Article 50(2)(a) of the UCITS Directive (2009/65/EC) ("UCITS Directive") which may have implications for UCITS which hold units or shares of collective investment schemes within the 10% limit provided for in Article 50 (2)(a), commonly referred to as the "trash bucket".
Article 50(2)(a) of the UCITS Directive provides that UCITS may not invest more than 10% of their assets in transferable securities and money market instruments which do not meet the UCITS eligibility requirements as detailed in Article 50(1) (i.e. they are not admitted to or dealt in on a regulated market which operates regularly and is open to the public).
ESMA's opinion states that UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive, being other UCITS and other collective investment undertakings, whether or not established in a Member State, which meet the following criteria:
- they are authorised under laws which provide that they are subject to supervision considered by the competent authority of the UCITS home Member State to be equivalent to that laid down in EU law, and that co-operation between authorities is sufficiently assured;
- the level of protection for unit holders is equivalent to that provided for unit holders in a UCITS, and in particular the rules on asset segregation, borrowing, lending and uncovered sales of transferable securities and money market instruments are equivalent to the UCITS Directive requirements;
- the business is reported on in half yearly and annual reports; and
- no more than 10% of the assets of the UCITS or other collective investment undertakings can, according to their constitutive documents, be invested in aggregate in units of other UCITS or other collective investment undertakings.
ESMA's opinion points to the fact that Article 50(2)(a) refers only to investments in transferable securities and money market instruments and not to units or shares of collective investment undertakings, and accordingly it follows that the derogation provided in Article 50(2)(a) does not extend to units or shares of collective investment undertakings.
ESMA expects that any portfolio adjustments required to ensure compliance with this opinion will be made taking into account the best interest of investors and at the latest by 31 December, 2013.
ESMA's competence to deliver an opinion is based on Article 29(1) (a) of Regulation (EC) No 1095/2010. Whilst such opinions are not binding, there is an expectation that such opinions will be adopted by competent authorities into local rules. Where a competent national authority does not comply with an opinion issued by ESMA, ESMA does have authority to initiate further procedures to ensure common, uniform and consistent application of EU law by national competent authorities. Accordingly, we await the Central Bank's official position in respect of ESMA's opinion.
However, there are at least two areas of concern with this opinion. Firstly, it appears to create a potential conflict between ESMA's opinion and the Eligible Assets Directive (Directive 2007/16/EC) insofar as it relates to closed-ended collective investment schemes. The Eligible Assets Directive has made it clear that certain closed-ended funds will fall within the definition of "transferable securities" and therefore be eligible for investment by UCITS subject to meeting certain criteria. In other words, they are funds but they qualify as transferable securities.
Secondly, ESMA's opinion suggests that the treatment of certain Non-UCITS ETFs (including those from outside the EU) as transferable securities would not be acceptable, which could exclude them entirely from a UCITS investment menu.
These areas may warrant further consideration of this opinion.
In conclusion, ESMA's opinion calls for limits on the scope of the "trash bucket", which means UCITS portfolio managers will need to carefully consider the composition of their portfolios in future, particularly holdings of units or shares in collective investment undertakings which do not meet the criteria outlined in Article 50(1)(e).
(V) THE INTERNATIONAL ORGANISATION OF SECURITIES COMMISSIONS ("IOSCO") POLICY RECOMMENDATIONS FOR MONEY MARKET FUNDS ("MMFS")
On 9 October 2012, IOSCO published its final report on policy recommendations and proposes fifteen recommendations as a basis for common standards globally for the negotiation of MMFs. The report follows a consultation in April, 2012 (IOSCO – Money Market Fund Systemic Risk Analysis and Reform Options). It is likely that the Commission will want to adopt IOSCOs proposals and in this regard it is likely that the Commission will issue a consultation paper in this area in 2013.
The final report may be viewed here; http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf
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