Wednesday July 25 2012

News Source: Fund Regulation

Focus: UCITS

Type: General

Country: European Union




Fund-Axis would like to highlight the recent publication by ESMA outlining its Guidelines for Exchange Traded Funds (“ETF’s”) & Other UCITS Issues (Annex III of the Paper).

ESMA Guidelines on ETF`s & Other UCITS Issues

The guideline on ETF’s and Other UCITS Issues as  issued by ESMA will need to be read by any asset manager or trade association that operates in the ETF & UCITS space. Asset Managers have 2 months to comply with the guidelines from the date of issuance of the Guidelines. The date of issuance will be considered as that date upon which ESMA have translated and published the guidelines on their website. Please check www.esma.europa.eu for further information on the publication date. ESMA have also outlined transitional provisions in Annex III of its report which should be referred to by interested parties where relevant.

Please note that a separate Fund-Axis article will deal with the consultation paper on the Treatment of Repos and Reverse Repos which you will find on our website.

HIGH LEVEL OVERVIEW

The aim of the guidelines is enhance the protection to investors into ETF’s and Index-Tracking UCITS schemes by giving a uniform approach to the information that should be communicated to investors into such schemes and also outlines the specific rules that need to be applied by UCITS schemes when entering into Financial Derivative Instruments and other EPM techniques. Finally the guidelines also set out the criteria which should be respected by the Financial Indices into which UCITS schemes invest.

 There are 6 key points that should be considered by interested parties in relation to these guidelines;

  1. The criteria surrounding collateral arrangements for collateral received by ETF’s and UCITS schemes have been further tightened under the new guidelines. These criteria are set out in full in Annex III of the report as linked above, but one of major changes surrounds the diversification requirements for collateral. The amount of collateral that can now be accepted from any one counterparty is 20%.
  2. ETFs must be properly labelled and as such any UCITS scheme set up as an ETF should carry a specific identifier showing it as such and be labelled as a UCITS ETF. This in ESMA’s opinion will facilitate easier identification of such schemes by potential investors. This information should be also included in the KIID and the Prospectus of the scheme. N.B. There is no requirement per ESMA to distinguish between synthetic ETF’s and Physical ETF’s
  3. The new guidelines also set out the requirements for revenues earned via EPM Techniques including securities lending. The new guidelines require that all Gross revenues derived from EPM Techniques have to be remitted in full to the UCITS or ETF scheme but net of any operating costs associated with such securities lending activities.
  4. Full recall of securities that have been lent out by ETF’s and UCITS schemes under securities lending arrangements must now be available at any time to the scheme. Please note that as of yet this requirement does not apply to repos or reverse repos as this forms part of the other consultation contained in Annex IV of the report, linked above and as such these arrangements should be continued for now as permitted by the current guidelines and regulation in issuance.
  5. The cap on securities lending that was discussed in the initial consultation paper as issued by ESMA has been excluded from the final guidelines and therefore there is no cap on the amount of securities lending that an ETF or UCITS scheme can engage in.
  6. Finally, where a UCITS or ETF Scheme engages in EPM Techniques, the ESMA guidelines now require further disclosure of same to investors specifically around the risks involved with such techniques, particularly Sales and Purchase Repo Arrangements and Securities Lending. The Guidelines as set out by ESMA will also require the full disclosure of the calculation methodologies for financial indices. This ESMA believes will enhance the ability of investors to replicate the performance of an index. 

Should you wish to contact the author of this article to discuss any queries that the above may have prompted, then please don’t hesitate to do so at info@funds-axis.com