On 26 July 2012, the European Commission published a consultation paper in respect of a future framework for investment funds entitled Product Rules, Liquidity Management, Depositary, Money Market Funds, Long-term Investments and has invited industry participants to submit responses by 18 October 2012.

The Consultation Paper complements the Commission’s on-going work on shadow banking and the recent ESMA publication Guidelines on Exchange Traded Funds and other UCITS Issues.

Purpose

The purpose of the consultation is to shape any further amendments to the UCITS regime and ultimately it will form the basis of “UCITS VI” which will build on the recent UCITS IV and the UCITS V initiatives. The consultation aims to enhance the Commission’s knowledge in eight specific areas, as detailed below:

Eligible assets

Commentary is sought on a number of issues including:

• The scope of assets and exposures that are deemed eligible for a UCITS fund
• Whether investment strategies are in line with investors’ expectations
• Whether there is a need to further develop the rules on the liquidity of eligible assets and market practice regarding non-eligible assets

Efficient Portfolio Management (EPM)

Techniques and instruments employed by UCITS for the purposes of EPM are summarised and the potential for systemic risk inherent in the use of some EPM techniques is considered.

OTC Derivatives

Queries are raised in relation to the treatment of over-the-counter derivatives cleared through central counterparties (particularly in respect of counterparty exposure) and whether an assessment of the current framework regarding operational risk and conflicts of interest is required.

Extraordinary Liquidity Management Tools

Current liquidity issues faced by some UCITS are summarised and perceived liquidity bottlenecks are explored.

Depositary Passport

There is currently no European passport for depositaries. Comments are sought on the possible introduction of a depositary passport.

Money Market Funds (MMFs)

The importance of MMFs and the on-going concern of their potential susceptibility to runs is examined. Three separate sub-topics are focussed on, namely:

• Valuation and capital
• Liquidity and redemptions
• Investment criteria and rating

Long Term Investment

The Consultation Paper looks at whether investment funds can play a key role in long term investments.

UCITS IV Improvement

Input is sought on the rules concerning the management company passport, master feeder structures, fund mergers, notification procedures and alignment with the AIFM Directive.

Current thinking is that this process of review and possible change will take up to two years (or more) to come into effect. 

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