Extension of Proposed Derogation to all UCITS

ESMA has published its final report which sets out amendments to its rules on collateral diversification as set out in paragraph 43 (e) of its Guidelines on ETFs and other UCITS issues. The Final Report confirms that all UCITS may be fully collateralised in different transferable securities and money market instruments issued or guaranteed by an EU Member State, one or more of its local authorities, a third country, or a public international body to which one or more EU Member States belong. The final report follows a consultation undertaken by ESMA in which it proposed to only grant UCITS money market funds a derogation from the provisions of paragraph 43 (e).

To avail of the derogation, a UCITS must receive securities from at least six different issues and securities from any single issue should not account for more than 30% of the UCITS’ net asset value. 

The derogation does not affect the other criteria for collateral management as set out in paragraphs 41 to 47 of the Guidelines.

Prospectus Disclosure

It should be noted that a UCITS that intends to be fully collateralised in securities issued or guaranteed by an EU Member State must disclose this fact in its Prospectus and identify the EU Member States, local authorities, or public international bodies issuing or guaranteeing securities which it is able to accept as collateral for more than 20% of the UCITS’ net asset value.

Disclosure in Annual Report

A UCITS that will be fully collateralised must also disclose the following in its annual report:

• Where collateral received from an issuer has exceeded 20% of the NAV of the UCITS, the identity of that issuer
• Whether the UCITS has been fully collateralised in securities issued or guaranteed by an EU Member State

Transitional Provisions

UCITS that existed before 18 February 2014 are not required to comply with the provisions relating to Prospectus disclosure until the earlier of:

• The first occasion after 18 February 2014 on which the UCITS Prospectus, having been revised or replaced for another purpose, is published
• 18 February 2015

The requirement to publish information in the annual report of an existing UCITS does not apply in respect of any accounting period that has ended before 18 February 2014.

Next steps

In its Final Report, ESMA states that the changes to the Guidelines will come into force 2 months after the Guidelines are translated into the official EU languages and published on the ESMA website. 

Contributed by Niall Crowley