ESMA outlines new guidelines on UCITS funds

The European Securities and Markets Authority (ESMA) has published its guidelines on exchange-traded funds (ETFs) and other Ucits funds, which will apply to national securities markets regulators and Ucits management companies.

Guidelines set out the information that should be given to investors about index-tracking Ucits and Ucits ETFs, together with specific rules for Ucits when entering into over-the-counter financial derivative transactions and efficient portfolio management techniques.

They also set out the criteria for financial indices in which Ucits may invest.
Key provisions are that Ucits that fall under the definition of Ucits ETFs will have to carry 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) like 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. Also, Ucits should only invest in financial indices which respect strict criteria regarding, inter alia, the rebalancing frequency and their diversification.

“These comprehensive guidelines are aimed at strengthening investor protection and harmonising regulatory practices across this important EU fund sector. They increase the level and the quality of information provided by Ucits to their investors, clarify the criteria for the management of collateralised transactions such as securities lending, repo and reverse repos and OTC derivatives, and set out the types of financial index in which Ucits may invest,” said Steven Maijoor (pictured), chairman of ESMA.

The guidelines were developed following a review of the current regulatory regime by ESMA found to be insufficient to address the specific features and risks associated with these types of funds and techniques.

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