IRELAND: IFSRA Policy Update 22010 – Collateral passed by UCITS to OTC Derivative Counterparties

Friday February 12 2010

Where a fund invests into derivatives there may be a need for scheme assets to be passed to a broker or counterparty as collateral against the derivative position.

There has until now been an issue as to whether such arrangements are consistent with the UCITS Directive which provides that the assets of a fund shall be entrusted to a trustee for safe-keeping.

This Policy Update confirms that such arrangements are consistent with the UCITS Directive. In the UK, the FSA provide similar confirmation in December 2009.

The background to the Irish Policy Update is the clarification of the same point by the Committee of European Securities Regulators (“CESR”) in their advice on Level 2 measures related to the UCITS management company passport to the European Commission in October 2009.

The Irish Regulator also notes that the CESR advice also provides that:

*Collateral passed must be taken into account in calculating risk exposure to the OTC counterparty as referred to in Article 52(1) of the UCITS Directive.

*Collateral passed may be taken into account on a net basis only where there is a legally enforceable netting arrangement in place.

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