Ireland: Covered Short Selling By UCITS Funds – The Debate Continues

Last Updated: 21 August 2008
Article by Karen Jennings
Most Read Contributor in Ireland, September 2019

1. Introduction

In light of the current difficult market climate, pressure is mounting upon fund managers and pension funds to deliver ever-more important outperformance to their clients. As a result, the possibility of allowing UCITS funds to engage in short selling techniques is receiving more attention at local and European level. Karen Jennings of Dillon Eustace considers recent developments in relation to possible strategies available to UCITS funds.

2. Short Selling by UCITS Funds

Shorting is one of the most important strategic tools now available. Shorting provides added exposure to a given market, allowing the fund manager to take an overweight position (long) in securities they like, but also to go actively underweight (short) in those they do not. In selling a security they do not own, the manager anticipates that it will fall in value and can be bought back at a lower price. Whereas a hedge fund can physically short-sell a stock or bond, Regulation 72 of UCITS Regulations 2003, as amended, prohibits a UCITS from engaging in uncovered physical short sales.

Physical short selling involves the actual sale of the security and it may be covered or uncovered. In light of the prohibition on UCITS funds from engaging in uncovered physical short sales, an alternative strategy for achieving the effect of shorting has become increasingly popular for UCITS fund managers, namely, synthetic shorting. Through the use of financial derivative instruments, a short exposure to the price of a security can be created, rather than physically selling the actual security. To date, 130/30 UCITS funds in the Irish market have relied upon such synthetic short selling techniques in order to allow fund managers to exploit negative opinions on securities.

Whilst it has been clear that a UCITS fund cannot engage in uncovered physical short sales, doubts have remained as to whether or not a UCITS fund can engage in covered physical short sales. On 5 October, 2007 the Irish Financial Services Regulatory Authority issued a revised policy note in respect of covered physical short selling by UCITS. The revised policy note purported to allow UCITS to borrow stock before it entered into the physical short sale of that stock and to treat such borrowed stock as constituting cover for the short sale provided that certain conditions were met. The basis for this policy rested upon the fact that Regulation 72 only prohibits uncovered physical short sales (not covered physical short sales) and further that the guidelines issued by CESR concerning eligible assets for investment by UCITS (Ref: CESR/07-044) suggest that that stock borrowed under a stock borrowing arrangement will not constitute borrowing under the UCITS Regulations. This opened the way for Irish UCITS to engage in covered physical short selling strategies.

Following the issue of the Irish Financial Services Regulatory Authority's policy note, certain other Member States expressed an interest in the possibility of permitting UCITS to engage in uncovered physical short sales. In order to ensure even implementation and interpretation of the UCITS Directive across the EU, the European Commission was asked to consider this matter further. The Commission has now concluded that covered physical short selling is not UCITS compatible for a number of reasons.

  • Firstly, it was felt that the borrowing of stock to cover the sale would not protect a UCITS from unlimited market risk. This is because the price of the stocks sold short could rise without limit.
  • Secondly, concern was expressed over the absence of any express provisions governing the management of the risks generated from such physical short selling techniques in the UCITS Directive.
  • Thirdly, the European Commission concluded that covered physical short selling could expose a UCITS to additional risks or risks which are more acute to those to which it would be exposed by virtue of synthetic exposure.
  • The final, and possibly the most significant, reason behind the Commission's position is the wording of Article 36 of the UCITS Directive. Article 36 prohibits borrowing by UCITS except on a temporary and limited basis (i.e. up to 10% of assets). It was felt that the borrowing of stock in order to provide cover for a physical short sale was not compatible with this restriction.

3. Future Developments

The European Commission has indicated its position to the Committee of European Securities Regulators ("CESR") and it is expected that CESR will consider this matter further with the possibility of correcting its guidelines on this issue. However at the current time, Irish UCITS funds are not permitted to treat borrowed stock as constituting cover for a physical short sale. It remains to be seen whether or not the Commission, based on CESR opinion, will vary its initial conclusions or whether any proposal to amend the UCITS Directive will materialise in order to pave the way forward for the possibility of covered physical short selling by UCITS funds in the future. As UCITS III evolves, one can only expect increasing demand for new tools to be placed at the disposal of UCITS fund managers in order to employ techniques which are currently available to hedge fund managers.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions