UNDERTAKINGS IN COLLECTIVE INVESTMENTS AND TRANSFERRABLE SECURITIES ("UCITS")
(i) Irish Funds letter to the Central Bank regarding UCITS V Depositary Agreements
On 13 October 2016, Commission Delegated Regulation (EU) 2016/438 regarding the obligations of UCITS funds, their relevant management companies and their depositaries (the "Delegated Regulation") came into effect.
The Delegated Regulation, supplementing the UCITS V Directive, provides further detail on the obligations imposed on depositaries under UCITS V and includes certain elements that must be included in depositary agreements.
On 10 October 2016, Irish Funds submitted a letter to the Central Bank regarding Depositary Agreements subject to UCITS V. Irish Funds state that given the volume of UCITS V depositary agreements for completion, and having regard to some of the other amendments which have been required to be made to fund documentation, there were a number of cases where the relevant depositary agreement had not yet been cleared of comment and in some instances not filed.
In the letter, Irish Funds advised that any outstanding depositary agreements which address the Delegated Regulation will be filed with the Central Bank as soon as practicable and that where the Central Bank is already aware of the status of a depositary agreement, as a result of submissions already made with the Central Bank, no further notification will be made via the Central Bank ONR system.
(ii) ESMA updates to Q&A on application of UCITS Directive
During the quarter, ESMA published two updated versions of its Q&A paper on the application of the UCITS Directive (2009/65/EC) as recently revised by UCITS V (2014/91/EU), the first on 12 October 2016 and the second version on 21 November 2016. The Q&A aims to promote common supervisory approaches and practices in the application of the UCITS Directive and its implementing measures. UCITS V introduces rules on remuneration policies and sanctions and strengthens the depositary regime.
The Q&A published on 12 October 2016 clarifies the following:
Section I Question 3 – A multi-lateral trading facilities ("MTF") operating in the EU can be considered to be a "regulated market" for the purposes of the UCITS Directive provided that certain requirements are complied with including that the MTF constitutes an MTF as defined in Article 4(1)(15) of MiFID Directive 2004/39/EC and operates regularly, is open to the public and is recognised.
Section II Question 7 – Information on remuneration which is posted on a UCITS website as required under UCITS V need not be translated and can be provided in English;
Section III Question 6(o) – Where a UCITS invests cash collateral which it receives in short term money market funds, those short term money market funds should be taken into account when complying with limits imposed on the UCITS with respect to investment in other funds; and
Section VII Question 1 – This question deals with the reporting obligation under the Regulation on reporting and transparency of securities financing transactions ("SFT Regulation") and outlines that the obligation to provide information on the use of securities financing transactions ("SFT") and total return swaps used by the UCITS during the relevant period in the periodic reports of the UCITS must be included in the next annual or half-yearly report to be published after 13 January 2017. This may relate to a reporting period beginning before 13 January 2017.
The Q&A was again amended on 21 November 2016 to include clarification on investment limits applicable where a UCITS invests in other underlying funds.
Section 1 Question 4a clarifies that a UCITS can acquire no more than 25% of the units of any "single UCITS" or other collective investment schemes ("CIS"). It also confirms that the reference to any "single UCITS or other CIS" relates to any individual sub-fund of a UCITS umbrella/other CIS umbrella.
Therefore when complying with this requirement, the investing UCITS must make sure that it does not acquire more than 25% of the units of any individual sub-fund within an umbrella UCITS/other umbrella CIS rather than applying this 25% limit at the umbrella fund level.
It should be noted that the Central Bank has always interpreted the above UCITS requirements in the same way; and
Section 1 Question 4b provides the same clarification with respect to the requirement that a UCITS cannot invest more than 10% of net assets in any one single UCITS/other CIS (or up to 20% of net assets if so permitted by the national regulators) and confirms that for the purposes of complying with this investment restriction, reference to "single UCITS or other CIS" relates to any one individual sub-fund within a UCITS umbrella/other CIS umbrella.
It should be noted that this was already clarified for Irish domiciled UCITS in the Irish legislation by virtue of Regulation 73(1) of the UCITS Regulations.
A copy of the October version of the Q&A can be found at the following link:
The November version of the Q&A can be located at the following link:
(iii) Central Bank Guidance on Fund Management Company Effectiveness
Following on from its third and final consultation on Fund Management Company Effectiveness – Managerial Functions, Operational Issues and Procedural Matters ("Third Consultation") issued in June 2016, which related to Consultation Paper 86, the Central Bank published the final version of the Fund Management Companies Guidance (the "Guidance") on 16 December 2016. It also published a feedback statement which outlines the rationale for the final position taken on certain matters (the "Feedback Statement").
The Guidance now sets out, in final form, the following six chapters:
- Delegate Oversight;
- Organisational Effectiveness;
- Directors Time Commitments;
- Managerial Functions;
- Operational Issues; and
- Procedural Matters.
The term fund management company includes an Irish domiciled UCITS management company, authorised AIFM, self-managed UCITS investment company or ICAV and an internally managed AIF.
In its Feedback Statement, the Central Bank has confirmed the following decisions:
Location of Directors & Designated Persons
The new rule around the location of Directors and Designated Persons which was proposed in the Third Consultation (the "Location Rule") was the focus of a significant number of responses received by the Central Bank.
In the Feedback Statement, the Central Bank discussed the responses received and it presented its analysis of the issues arising under the Location Rule, under the headings of 'Effective Supervision', 'Impact' and 'Indirect Impact'.
The outcome of this analysis by the Central Bank is that, having been 'swayed...to a certain extent by arguments concerning expertise and the need to facilitate organisational models which draw appropriately on the expertise of the promoter/investment manager' it has decided to adjust the calibration of the "effective supervision" requirement to permit more involvement by persons located outside the EEA by reducing the ratio from "at least two thirds" to "at least half" of directors and managerial functions in the EEA. The Guidance also confirms that at least half of the managerial functions must be carried out by at least two designated persons in the EEA.
The final Location Rule is as follows:
A fund management company which has a PRISM impact rating of Medium Low or above will be required to have at least:
- Three Irish resident directors or at least two Irish resident directors and one designated person based in Ireland;
- Half of its directors in the EEA; and
- Half of its managerial functions performed by at least two of designated persons in the EEA.
A fund management company which has a PRISM impact rating of Low will be required to have at least:
- Two Irish resident directors;
- Half of its directors in the EEA; and
- Half of its managerial functions performed by at least two of designated persons in
The proposal to allow half of the directors and designated persons to be located outside the EEA is to be welcomed to the extent that it brings greater flexibility and potential operational efficiency. It may also result in the promoters / investment managers who are not located in the EEA carrying out those managerial functions which are most suited based on their expertise for example, the investment management, risk management or distribution managerial functions.
Managerial Functions Guidance
The guidance on managerial functions is largely in the manner proposed in the Third Consultation. However there are certain changes, the principal changes being the following:
- The deletion of the so-called 'co-location rule' which had required that where designated persons were not working in the same location, they should be employed by the same group of companies;
- Clarification of the Central Bank's expectations as regards its minimum requirements for record retention, archiving and retrievability of the relevant documents of a fund management company. The Guidance now provides that the fund management company must ensure that there are adequate procedures and processes in place to seek to avoid any manipulation of its hard copy or soft-copy documents;
- Clarification of what the Central Bank considers the term 'immediate' to mean in the context of providing relevant documents to the Central Bank. The Guidance now provides that where documentation is requested by the Central Bank before 1pm, it should be provided to the Central Bank on the same day. Any request by the Central Bank made after 1pm should be provided before 12 noon on the next business day; and
- The Guidance provides that the retention of records policy of the fund management company should be independently audited, with the Central Bank noting in the Feedback Statement that this audit may be undertaken by an external party or by the internal audit function.
Timing and Transitional Arrangements
Existing management companies must comply with the new rules introduced by the Central Bank by 1 July 2018.
These new rules relate to (i) streamlining of managerial functions to six managerial functions, (ii) the organisational effectiveness role (iii) the retrievability of records rule and (iv) the Location Rule.
It should be noted that any fund management companies authorised between 1 November 2015 and 30 June 2017 are required to comply with the new managerial functions and organisational effectiveness role as at the date of authorisation.
In addition, the Central Bank will only approve applications for authorisation from any new management company submitted on or after 1 July 2017 where the fund management company will be organised in a way which complies with the new rules introduced by the Guidance.
The new rules will be included in the amended Central Bank UCITS Regulations and in the forthcoming Central Bank AIF Regulations (which will replace the Central Bank's AIF Rulebook).
The Central Bank has updated its UCITS and AIFMD Q&A's to address the transitional arrangements related to the Guidance.
A copy of the Guidance and the Feedback Statement is available via the following links:
(iv) Central Bank UCITS Q&A
On 19 December 2016, the Central Bank published a fifteenth edition of the UCITS Q&A, which include the following:
Existing question ID 1015 has been updated to confirm that the existing regulatory considerations relating to acquisition of shares via the Shanghai-Hong Kong Stock Connect apply equally to the Shenzhen-Hong Kong Stock Connect. This follows an earlier announcement that the Central Bank will now permit UCITS to acquire shares via the Shenzhen-Hong Kong Stock Connect;
Question ID 1053 has been deleted and replaced to clarify the transitional arrangements applicable to specific provisions of the final version of the Fund Management Companies Guidance (discussed in section (iii) above);
New question ID 1075 confirms that an existing UCITS management company or UCITS SMIC availing of the transitional arrangements under ID 1053 can make changes to its organisational structure during the transitional period provided the changes bring it closer to compliance with the final version of the Fund Management Companies Guidance;
New Question ID 1073 has been added to confirm that it is not possible for sub-funds of an ICAV to have different auditors; and
New Question ID 1074 has been added to clarify that the business plan of a UCITS management company or a UCITS SMIC must be kept up to date but there is no obligation to submit changes to the business plan to the Central Bank for review or approval. However, the business plan must be provided on request to the Central Bank. If the relevant party intends to engage in any significant new activities, they must consult in advance with the Central Bank.
The latest version of the Central Bank's UCITS Q&A can be located at the following link:
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