CESR publishes today its final Level 3 guidelines on the classification of hedge fund indices as financial indices (Ref. CESR/07-434, with a feedback statement Ref. CESR/07-433). These guidelines are part of the “CESR’s guidelines concerning eligible assets for investment by UCITS” (CESR/07-044, March 2007). These measures address the issue as to whether hedge fund indices could be properly classified as “financial indices” for the purposes of the UCITS Directive.
CESR considers that in order to fall under the classification of a “financial index” as referred to by the UCITS Directive, hedge fund indices must comply with the criteria applicable to common financial indices set out in Article 9 of Directive 2007/16/EC as regards the degree of diversification; the market to which they refer; and the way they are published. In addition, hedge fund indices will also have to fulfill additional requirements as regards to the methodology of the index and information disclosure. The selection of components to be included in the index has to be made on the basis of predetermined rules and objective criteria. Furthermore, it must not be influenced by any payments made to the provider, and the methodology has to ban any “backfilling practice”, (that is to say, any retrospective changes to previously published index values). In addition, the guidelines require the UCITS to perform an additional “due diligence” process before deciding to invest in hedge fund indices. In particular, in assessing the quality of the index, the UCITS must take into account, as outlined in the guidelines, the following factors (as a minimum): the comprehensiveness of the index methodology, the availability of information about the index, and matters relating to the treatment of index components. The UCITS must keep a record of its assessment.
The guidelines have been adopted after an intense consultation of the market. In particular, CESR published in October 2006 an issues paper (CESR/06-530), and in February 2007 the consultation document “Clarification of the definitions concerning eligible assets for investment by UCITS: can hedge fund indices be classified as financial indices for the purpose of UCITS?” (CESR/07-045). CESR also organised a public hearing, held on 2 April 2007.
The guidelines published today complement the Level 2 implementing Directive (Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the co-ordination of Law, Regulations, and administrative provisions relating to UCITS as regards the clarification of certain definitions) (see http://eur-lex.europa.eu/en/index.htm) and supplement the Level 3 guidelines already adopted by CESR “CESR’s guidelines concerning eligible assets for investment by UCITS” (CESR/07-044 of March 2007), which is available on our website under the section: Expert groups/Investment management.
