ESMA issues UCITS guidelines and consultation on repos
ESMA has published a report detailing new guidelines on ETFs and other UCITS issues and launching a consultation on repo arrange
Published August 2012
The European Securities and Markets Authority (ESMA) has been reviewing the regulatory regime applicable to UCITS ETFs, structured UCITS and other categories of UCITS since it published its initial ‘policy orientations’ in July 2011. A consultation paper on ESMA’s ‘Guidelines on ETFs and other UCITS issues’ also issued in January 2012. Building on this work, ESMA published on 25 July 2012 a further document entitled ‘Report and Consultation paper’ which outlines ESMA’s new guidelines on ETFs and other UCITS issues and launches a new consultation on recallability of repo and reverse repo arrangements. The new rules are not now expected to come into force until the end of February 2013 because ESMA has started a further consultation process around repo arrangements.
ESMA’s new guidelines aim to strengthen investor protection and ensure greater harmonisation in regulatory practices. A number of different means are used to achieve this, including improving the content of the information communicated to investors and setting out quantitative and qualitative criteria for collateralised transactions such as securities lending arrangements, repo and reverse repo transactions and OTC financial derivative transactions.
ESMA’s document is divided in four parts:
- Feedback in relation to the public consultation that issued in January 2012
- A cost benefit analysis for amending the existing guidelines following the observations of the consultation
- The new ‘Guidelines on ETFs and other UCITS issues’
- A new consultation on repos and reverse repos with a closing date of 25 September 2012
New guidelines on ETFs and other UCITS issues
Annex III contains new guidelines relating to index tracking UCITS, UCITS ETFs, efficient portfolio management techniques and financial derivative instruments. Any new UCITS created after the date of application of the guidelines will need to comply with the guidelines immediately, while there are various grandfathering provisions for existing UCITS generally covering a 12 month period after the application date.
The guidelines set out:
- The level and quality of information to provide to investors on index trading UCITS and ETF UCITS
- UCITS that fall under the definition of UCITS ETFs will have to use the identifier 'UCITS ETF' in their name
- UCITS ETFs will have to ensure appropriate redemption conditions for secondary market investors by opening the fund for direct redemptions when the liquidity in the secondary market is not satisfactory
- UCITS entering into efficient portfolio management techniques (EPM) such as securities lending activities will have to inform investors clearly about these activities and the related risks. All revenues net of operating costs generated by these activities should be returned to the UCITS. When a UCITS enters into securities lending arrangements, it should be able at any time to recall any securities lent or terminate any agreement into which it has entered
- UCITS receiving collateral to mitigate counterparty risk from OTC financial derivative transactions or EPM techniques should ensure that the collateral complies with very strict qualitative criteria and specific limits in relation to the diversification
- UCITS investing in financial indices will have to ensure that investors are provided with the full calculation methodology of financial indices. Additionally, UCITS should only invest in financial indices which respect strict criteria regarding, inter alia, the rebalancing frequency and their diversification
Consultation on the treatment of repurchase and reverse repurchase agreements
A specific consultation on repurchase and reverse repurchase arrangements, when used by UCITS, has been launched, with the consultation period closing on 25 September 2012. The new regime would allow a proportion of the assets of the UCITS to be non-recallable at any time at the initiative of the UCITS. The proposed guidelines include safeguards to ensure that the counterparty risk arising from these arrangements is limited, and that UCITS entering into such arrangements can continue to execute redemption requests.
ESMA will take into account the responses to this consultation in developing the final policy approach on repo and reverse repo transactions. That policy approach will be integrated into the remainder of the guidelines on ETFs and other UCITS issues to produce a final package of measures. It is anticipated that the complete package of guidelines will now not take effect until February 2013, due to the additional consultation. The Central Bank will be required to update its UCITS Guidance Notes and Notices within this timeframe to reflect the new guidelines.
Download ESMA’s report and consultation paper