On 25 July 2012, ESMA published guidelines on ETFs and other UCITS issues, which included in Annex IV a consultation paper on the recallability of repurchase and reverse repurchase agreements. The consultation process has resulted in the publication, on 4 December 2012, of the ESMA Guidelines on Repurchase and Reverse Repurchase Agreements (the “Guidelines”).
The stated purpose of the Guidelines is to better protect investors in UCITS which use repurchase and reverse repurchase agreements. The intention is that the use by a UCITS of repurchase and reverse repurchase agreements should not compromise the ability of the UCITS to meet redemption requests.
The Guidelines (of which there are three) are as follows:
- A UCITS that enters into a reverse repurchase agreement should ensure that it is able “at any time” (see 3. below) to recall the full amount of cash or to terminate the reverse repurchase agreement on either an accrued basis or a mark-to-market basis. When the cash is recallable at any time on a mark-to-market basis, the mark-to-market value of the reverse repurchase agreement should be used for the calculation of the net asset value of the UCITS.
- A UCITS that enters into a repurchase agreement should ensure that it is able “at any time” (see 3. below) to recall any securities subject to the repurchase agreement or to terminate the repurchase agreement into which it has entered.
- Fixed-term repurchase and reverse repurchase agreements that do not exceed seven days should be considered as arrangements on terms that allow the assets to be recalled “at any time” by the UCITS.
Compliance with the Guidelines will require a review of:
- A fund’s prospectus to ensure disclosure of the Guidelines
- Operational procedures and policies to ensure that the Guidelines are adhered to in the management of the fund
- Contractual arrangements to ensure that the arrangements or commitments currently in place will permit the fund to meet the Guidelines
- Board processes to ensure proper oversight and on-going management of the Guidelines is in place
The Guidelines form part of ESMA’s Guidelines on ETFs and other UCITS issues.
The official translations of ESMA’s Guidelines have been published on the ESMA website on 18 December 2012. This publication triggers a period of two months within which the Central Bank has to declare to ESMA either that it intends to comply with ESMA’s Guidelines or, alternatively, explain why it will not do so. However, it is anticipated that the Central Bank will adopt ESMA’s Guidelines in full.
For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.