EUROPE: ESMA consultation on diversification of collateral in relation to UCITS

Monday December 23 2013

The European Securities and Markets Authority has published a consultation paper on revision of the provisions on diversification of collateral in ESMA’s guidelines on ETFs and other UCITS issues.

In December 2012, ESMA published the guidelines on ETFs and other UCITS issues (ESMA/2012/832). Since the entry into force of the guidelines, ESMA has been asked by stakeholders on numerous occasions to reconsider its position on the requirements on collateral diversification (contained in paragraph 43(e) of the guidelines) on the basis that they have a significant adverse impact on UCITS’ collateral management policies, particularly as regards money market funds that place cash into reverse repurchase agreements.

As a result of the feedback received, ESMA has publishing a consultation paper seeking stakeholders’ views on the merits of revising the requirements on collateral diversification and, should this be necessary, on the best ways to address stakeholders’ concerns while retaining the appropriate level of investor protection.

ESMA is proposing to amend the provisions on collateral diversification in paragraph 43(e) of the guidelines on ETFs and other UCITS issues as below:

“Collateral diversification (asset concentration) – collateral should be sufficiently diversified in terms of country, markets and issuers. The criterion of sufficient diversification with respect to issuer concentration is considered to be respected if the UCITS receives from a counterparty of efficient portfolio management and over-the-counter financial derivative transactions a basket of collateral with a maximum exposure to a given issuer of 20% of the UCITS’ net asset value. When a UCITS is exposed to different counterparties, the different baskets of collateral should be aggregated to calculate the 20% limit of exposure to a single issuer. By way of derogation from this sub-paragraph, a UCITS that meets the criteria for the definition of Money Market Fund or Short-Term Money Market Fund of the guidelines on a common definition of European money market funds (Ref. 10-049) may receive collateral up to 100 % of the UCITS’ net asset value in different transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country, or a public international body to which one or more Member States belong. Such a UCITS should receive securities from at least six different issues, but securities from any single issue should not account for more than 30 % of the collateral received. This derogation does not affect the other criteria for collateral management as set out in paragraphs 41 to 47 of the guidelines.”

ESMA will take into account responses to the consultation paper in finalising the guidelines on the diversification of collateral received by UCITS in the context of efficient portfolio management techniques and OTC transactions for adoption in Q1 2014.

Comments should reach ESMA by 31 January 2014.

Click on the above link for the consultation paper.