Monday July 28 2014

News Source: Fund Regulation

Focus: UCITS

Type: General

Country: Ireland




The Central Bank issued a Consultation Paper on 28 July 2014 on the adoption of European Securities and Markets Authority`s (ESMAs) revised guidelines on ETFs and other Undertakings for the Collective Investment of Transferable Securities (UCITS) issues.

In December 2012 ESMA published guidelines on ETFs and other UCITS issues (ESMA/2012/832). The Guidelines included those relating to collateral which UCITS may receive on foot of an Efficient Portfolio Management techniques (securities lending or repo) (“EPM”) or in the context of an OTC derivatives transaction. An amendment to the requirements on collateral diversification, set out in paragraph 43(e) of those guidelines, was subject to a consultation published by ESMA on 20 December 2013 (ESMA/2013/1974). The proposal by ESMA in that paper would provide a derogation from the collateral diversification requirement where collateral consisted of securities issued or guaranteed by a Member State, one or more of its local authorities, a third country or a public international body of which one or more Member States belong. The derogation would only apply to UCITS which were Short Term Money Market Funds or Money Market Funds (both “UCITS MMFs”).

Respondents to the consultation unanimously supported the ESMA proposal but the majority also considered that the disapplication should not be limited to UCITS which were Short Term Money Market Funds or Money Market Funds (UCITS MMFs) and should apply to all UCITS.
The Central Bank is proposing to implement the revised ESMA guideline as follows:

  • Provide that all UCITS may avail of the derogation from the collateral diversification requirement where the collateral consists of securities issued or guaranteed by a Member State, one or more of its local authorities, a third country or a public international body of which one or more Member States belong;
  • Delete the existing rule in the UCITS Notices which requires that collateral received by UCITS must be “of high quality”; and
  • Replace this with a rule to be added to the UCITS Rulebook, that UCITS may only accept ‘high quality’ collateral and that in determining whether collateral is of high quality shall conduct an assessment prior to accepting the collateral which takes into account:

(i) the credit quality of the instrument;
(ii) the nature of the asset class represented by the collateral;
(iii) any operational risk;
(iv) any other significant related counterparty risk;
(v) the liquidity profile.

Where the acceptance of the collateral would mean that the collateral issuer constituted more than 20% of the total collateral held by the UCITS, the UCITS will apply the additional resources which a prudent UCITS would apply to a more detailed assessment of the credit quality of that collateral.

This consultation closes on 17 October 2014.

Click on the above link for further details.