On 26 July 2012 the Central Bank issued very welcome clarifications in relation to its position in respect of UCITS which use VaR to calculate global exposure.

This clarification was partly informed by the publication by ESMA, on 9 July, of a Questions and Answers paper in relation to Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS (Q&A).

The background to the principal problem related to the fact that CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (2010) require all UCITS funds which use VaR to calculate global exposure, to disclose the expected levels of leverage in their prospectuses.  Leverage was to be calculated using the “sum of the notionals” of the derivatives used.  There was an industry concern that the concept of gross notionals as a market impact indicator had been confused with an indication of the UCITS risk profile as a whole, resulting in misleading disclosure to investors.

The Q&A provide that UCITS using VaR to calculate global exposure could also disclose leverage on the basis of the commitment approach.  The Central Bank has acknowledged this and also the limitations of using the “sum of the notionals” as a measure of the risk profile of a UCITS and has committed to raising the matter with ESMA for further discussion.  The Central Bank will also no longer require the disclosure of an upper limit on leverage within a Prospectus.

In addition, since 2011, the Central Bank had been requiring that UCITS having a gross notional leverage amount of 500% or greater impose a minimum subscription amount of €100,000 and provide additional reporting to the Central Bank on a half yearly basis.  The introduction of this minimum subscription amount is not a general UCITS requirement and was regarded as being out of step with the position of other regulators.  As a result of its own review and the publication of the Q&A, the Central Bank also confirmed that it would no longer impose minimum subscription requirements or limits on the level of leverage employed by Irish authorised UCITS.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.