CESR’s draft advice includes proposals on:
- The eligibility of “structured financial instruments”: CESR proposes, for example, that the UCITS should take into consideration the following factors in deciding whether or not any security is a "transferable security" and eligible for a UCITS: liquidity, valuation, availability of information, transferability, consistency with the stated investment objectives of the UCITS and the possibility to assess risks related to the instrument.
- The eligibility of closed end funds: According to CESR’s proposal, where a listed closed end fund takes the form of a transferable security, it can be eligible for a UCITS, provided that some additional criteria concerning investor protection are met. UCITS can, however, not make investments in listed closed end funds for the purpose of circumventing the investment limits provided for UCITS by the UCITS
- The eligibility of money market instruments (MMI) not dealt in on a regulated market: According to CESR’s proposal, it remains the responsibility of the UCITS to ensure whether a MMI that is not dealt in on a regulated market is an eligible asset. The following key areas should be considered by the UCITS when assessing the eligibility of a MMI: whether an information memorandum providing information on both the issue and the legal and financial situation of the issuer is available prior to the issue of the MMI, whether this information memorandum is regularly updated and subject to control by an independent authority, whether each issuance has a minimum amount of EUR 150.000 or the equivalent in other currencies and whether free transferability and electronic settlement in book-entry are possible.
- The efficient portfolio management as regulated by Art. 21 (2) of the UCITS Directive: CESR proposes, that the transactions by UCITS in this regard have to be economically appropriate. This implies that they are realized in a cost-effective way. Furthermore the transactions should be for one or more of the following three specific aims: the reduction of risk, the reduction of cost or the generation of additional capital or income for the UCITS with an acceptably low level of risk.
- The eligibility of credit derivatives: According to CESR’s proposal, credit derivatives are eligible instruments for UCITS, provided that they fulfil, for example, the following requirements: The credit derivative complies with the conditions of eligibility of derivative instruments, the end of the transaction can only result in the delivery or in the transfer of assets eligible for UCITS, including cash, and the UCITS has taken adequate measures in order to limit risks of asymmetry of information, especially when dealing with related parties. In addition, a UCITS investing in credit derivatives has to be able to demonstrate that it has the organization and the means needed in this regard as further specified in the draft advice.
- Index replicating UCITS: CESR proposes that a UCITS is deemed to replicate the composition of a certain index if it has the aim to replicate the composition of its underlying assets. This aim can be achieved through the use of derivatives, or any other techniques and instruments as referred to in Art. 21 (2) of the UCITS Directive.
Background:
The original UCITS Directive (85/611/EEC, often referred to as the UCITS I Directive) was amended and the two amending Directives (2001/107/EC and 2001/108/EC, the so-called UCITS III) were published in the Official Journal on 13 February 2002. The amending UCITS Directive 2001/108/EC focused essentially on the "product" (the investment fund).
It extended the range of financial assets in which UCITS may invest. As a result, UCITS are now permitted to invest not only in listed shares and bonds as before, but also in bank deposits, money market instruments, financial derivatives (i.e. standardised option and futures contracts dealt on regulated exchanges and over-the-counter derivatives) and in units of other collective investment undertakings. The new rules also recognise investment management techniques widely employed such as "tracking" an index (i.e. investment in securities of different issuers provided for in a given index).
Modern financial markets have generated a huge variety of complex financial instruments which are in constant evolution. In the context of the implementation of the UCITS III Directive, the issue has arisen whether or to what extent some instruments could be considered eligible investments (i.e. “eligible assets”) for a UCITS in compliance with the relevant provisions of the UCITS Directive, in particular the definitions of “transferable securities” under Art. 1 (8), of “money market instruments” under Art. 1 (9) and the list of authorised investments under Art. 19.
The consistent implementation and interpretation of EU legislation is a crucial dimension of the building up of the single market in financial services. In view of this, the Commission intends to make use of the delegated powers conferred by Art. 53a of the UCITS Directive to the Commission, to clarify some of the definitions pertaining to eligible assets which are contained in the UCITS Directive. In its preparation of possible draft comitology instruments, the Commission has therefore requested CESR to prepare technical advice for this purpose.
The EU Commission’s mandate, published by CESR on 28 October 2004, requested CESR to submit its advice on this mandate by the end of October 2005. When completed, CESR’s advice will assist the European Commission in developing a legal text which will take the form of either a Regulation or a Directive. This legislation will set out what is known under the Lamfalussy legislative process as Level 2 technical implementing measures.
CESR’s draft advice published today follows a Call for Evidence on 28 October 2004 (Ref. CESR/04-586), to which 15 responses were received. The responses can be found on CESR’s website under the section “Consultations” and “Closed consultations and responses”.
CESR will host a hearing at CESR’s offices in Paris on 9 May for all interested parties wishing to express their views on the draft advice in person. To register for the open hearing, please visit the CESR website (www.cesr-eu.org), and book a place under the heading “Hearings”. Comments on the draft advice are welcomed by 10 June 2005 and can be submitted online via CESR’s website under the heading “Consultations”.
A timetable for CESR’s work in this area can be found in the Consultation Paper.
