EUROPE: CESR publishes its final advice on eligible assets

Thursday January 26 2006

CESR has today published its final advice to the European Commission on eligible assets of UCITS. Clarification of the eligible assets of UCITS is one of the four priority actions the European Commission has indicated in its Green Paper on Investment Funds in July 2005.

CESR’s advice can be found at the above link or in the attached pdf.

One of the notable points in the final advice is that, as regards derivatives on hedge fund indices, that given the complexities of hedge fund indices and the fact that they are still developing, CESR cannot recommend, at this stage, allowing hedge fund indices to be considered as financial indicies for the eligibility of UCITS.

This obviously goes against the FSA’s previously stated position and it is notable that CESR states that Member State Regulators have agreed not to authorise any further such funds under UCITS – at least until CESR has reconsidered the positiononce it has gained sufficient experience; October 2006 is cited as a target date.

Some of the other key points are as follows:

*Liquidity of transferable securities – CESR’s view is that the need for instrument liquidity is related to Article 37, which requires that a UCITS `must re-purchase or redeem its units at the request of any unitholder.` Therefore, so long as there is sufficient liquidity within the fund, there is no need to assess the individual liquidity of every transferable security in order to determine its eligibility.

* Negotiability of transferable securities – CESR has amended its advice so as not to preclude investment in private placements.

*Structured Financial InstrumentsStructured Financial Instruments which are transferable securities should be dealt with as transferable securities.

*Eligibility of closed end fundsClosed end funds can be eligible for UCITS so long as they are transferable securities and additionally that the asset management activity carried on by or on behalf of the closed end fund must be subject to appropriate investor protection safeguards.

*The eligibility of money market instruments.

After the second consultation there was concern that CESR’s advice could rule out investment in certain money market instruments, such as certificates of deposit, which would not be able to fulfill the requirements that CESR were proposing. This looks to have been moved forward in the final advice which makes a distinction betwen different types of issuers, and the information requirements have been relaxed for certain types of issuers / issues, e.g. when the issuer is an establishment subject to prudential supervision.