In a nutshell, the CSSF Circular 13/559 brings:
The required transparency and communication in the prospectuses, KIIDs or annual reports are greatly increased, especially for UCITS ETFs, index tracking UCITS, OTC derivative instruments transactions and EPM, such as security lending.
While UCITS ETFs now have to use the name ‘UCITS ETF’ and inform on their management methods (active or passive), NAV calculation methodology and liquidity offered to secondary market investors, index tracking UCITS must communicate their tracking methods, expected and realised tracking errors and explanations on divergence, and, where applicable, their expected leverage and its consequences for investors.
Finally, use of OTC financial derivative transactions and EPM techniques should now be accompanied with new disclosures regarding, amongst other aspects, their risk profile, impacts for investors, revenue sharing agreements, limits, counterparty risk, collateral and risk management policy.
The ESMA guidelines reconcile the previous dual regime for EPM, mainly governed by CSSF Circular 08/356, and OTC FDIs, mainly framed in CESR 10-788 guidelines, into a unified set of rules and a resulting new collateral management framework.
The new requirements include stricter collateral eligibility criteria, diversification, valuation, stress testing, portfolio management and reinvestment rules. The utter reshaping and growth of collateral management within management companies—as a result of the combined requirements of ESMA guidelines and EMIR—should reinforce the role and relevance of dedicated collateral management functions and the identification of the appropriate operating model for their implementation: in-house or outsourced, relations with compliance and/or risk management functions, etc.
The eligibility of some financial indices may be challenged by the new requirements such as diversification, transparency, quality, calculation or independent valuation which could impact current UCITS portfolios and investment strategies. Furthermore, since documented initial due diligence of financial indices is required before investing, investment processes should be adapted to include the new eligibility criteria and limitations.
Following its official publication by the CSSF in Circular 13/559, as of 18 February 2013, the ESMA Guidelines are now applicable for newly launched UCITS. With regard to most requirements, existing UCITS are granted a 12-month transition period; however, even prior to 18 February 2014, modification of marketing documents or publication of financial reports could trigger prompt compliance requirements.
Deloitte Luxembourg has global regulatory, compliance and risk management knowledge in the UCITS investment management area.
Drawing on our methodologies, insights on market best practices and experienced consulting professionals, we can assist you in assessing the impact of the new guidelines on your activities, in identifying potential areas of weakness or improvements to be made, and in defining an appropriate action plan to overcome the challenges and capture the opportunities brought by changing regulatory frameworks.