IRELAND: Central Bank publishes new edition of UCITS Q and A

Thursday July 16 2015

On 15 July 2015, the Central Bank published a Sixth Edition of the Undertakings for Collective Investments in Transferable Securities (UCITS) Q&A. New questions include ID 1014 concerning UCITS Irish Collective Asset-management Vehicle (ICAV), and ID 1015 concerning Irish UCITS seeking to acquire shares through Shanghai-Hong Kong Stock Connect.

ID 1014: Should the object clause in a UCITS ICAV’s instrument of incorporation include the text set out in section 6(3)(a) of the ICAV Act 2015 or the text set out in Regulation 4(3)(a) of the UCITS Regulations 2011 (SI No 352 of 2011)?

Answer: Section 6(3)(a) of the ICAV Act 2015 requires that the sole object of an ICAV must be included in the instrument of incorporation as follows:

‘the sole object of the ICAV is the collective investment of its funds in property and giving members the benefit of the results of the management of its funds’.

While Regulation 4(3)(a) of the UCITS Regulations 2011 specified what the sole object of a UCITS is, it does not specifically require that this be set out in the UCITS constitutional document.

The sole object provisions in the ICAV Act 2015 and UCITS Regulations 2011 are not inconsistent with each other. In the Central Bank’s view, text included in a UCITS ICAV’s instrument of incorporation consistent with section 6(3)(a) of the UCITS Regulations. Accordingly, the object clause in a UCITS ICAV’s instrument of incorporation should include the text set out in section 6(3)(a) of the ICAV Act 2015.

ID 1015: What are the regulatory considerations around Irish authorised UCITS seeking to acquire Chinese shares through the Shanghai-Hong Kong Stock Connect Infrastructure?

Answer: Before an Irish authorised UCITS acquires Chinese shares through the Shanghai-Hong Kong Stock-Connect infrastructure for the first time, its depositary would need to satisfy itself that the manner in which the shares were to be held allowed that depositary to meet its legal obligation under the UCITS Regulations and any conditions imposed by the Central Bank.

If an Irish authorised UCITS proposes to acquire Chinese shares through Stock Connect, in order to meet the legal obligations on a depositary, the depositary of the investment fund, or an entity within its custodial network (i.e. a sub-custodian), must ensure that it retains control over the shares at all times. The relevant legislation does not provide for the Central Bank to recognise eligible clearing structures. This obligation rests on the depositaries in the first instance.

However, from the information provided by the relevant authorities, it is evident to the Central Bank that the legal obligations of a depositary cannot be met without at least being a participant in HKSCC. It is also clear that in all cases, at the present time, arrangements where the broker of the investment fund is a participant of Hong Kong Securities Clearing Company Limited (HKSCC) but not an entity within the depositary’s custodial network, will not satisfy the provisions of the relevant legislation.

There are a number of options in terms of level of participation within HKSCC, namely General Clearing Participant, Direct Clearing Participant or Custodian Participant. The depository or a member of its custodial network must identify one or more levels of participation, if any, which would be in line with its legal obligations as a depository.

It is incumbent on the depository to review and keep under review the Stock Connect infrastructure arrangements to ensure that its legal obligations can be met. This is the case with reliance on all such systems around the world.

Click on the above link for further details.