As the UCITS acronym suggests, its original focus was on investment in "transferable securities" although UCITS do offer far wider investment possibilities, as explained below. Additionally, a primary UCITS focus has been on "money market instruments". Although the full definitions of both terms are set out in Appendix A, we have highlighted the key elements of both below, particularly given the clarifications provided in 2007 by the Eligible Assets Directive.

A. Transferable Securities

  1. UCITS Definitions

    The term "transferable securities" is defined as follows:

    • shares in companies and other securities equivalent to shares in companies ("shares");
    • bonds and other forms of securitised debt ("debt securities");
    • other negotiable securities which carry the right to acquire any such transferable securities by subscription or exchange;

    other than the permitted UCITS efficient portfolio management (EPM) techniques and instruments.
  2. Clarification by Eligible Asset Directive

    In 2007, the Eligible Assets Directive clarified the above definition by providing that the reference to transferable securities "shall be understood as a reference to financial instruments which fulfill the following criteria":

    1. the potential loss which the UCITS may incur with respect to holding those instruments is limited to the amount paid for them;
    2. their liquidity does not compromise the ability of the UCITS to comply with its obligation to provide at least fortnightly redemption facilities;
    3. reliable valuation is available for them as follows:

      1. in the case of securities admitted to or dealt in on a regulated market in the form of accurate, reliable and regular prices which are either market prices or prices made available by valuation systems independent from issuers;
      2. in the case of other securities (i.e. the aggregate 10% that can be invested in transferable securities and money market instruments not specifically referred to in Article 50(1)), in the form of a valuation on a periodic basis which is derived from information from the issuer of the security or from competent investment research;

    4. appropriate information is available for them as follows:

      1. in the case of securities admitted to or dealt in on a regulated market as referred to in subparagraphs (a) to (d) of Article 50(1), in the form of regular, accurate and comprehensive information to the market on the security or, where relevant, on the portfolio of the security;
      2. in the case of other securities as referred to in Article 50(2), in the form of regular and accurate information to the UCITS on the security or, where relevant, on the portfolio of the security;

    5. they are negotiable;
    6. their acquisition is consistent with the investment objectives or the investment policy, or both, of the UCITS;
    7. their risks are adequately captured by the risk management process of the UCITS.

    It is worth noting that liquidity is a central requirement for UCITS portfolios and, accordingly, there are broad principles laid down regarding presumptions as to liquidity, assessment of liquidity risk where information is available which suggests redemption facilities could be compromised by a transferable security as well as principles regarding consideration of or presumption of negotiability.
  3. Closed Ended Funds

    The Eligible Assets Directive has made it clear that certain closed-ended funds will fall within the "transferable securities" definition and, therefore, be eligible for investment by UCITS where:

    1. they fulfill the criteria set out in "(ii) Clarification by Eligible Assets Directive" above;
    2. they are subject to corporate governance mechanisms applied to companies or equivalent to those applied to companies;
    3. they are managed by an entity which is (or where asset management activity is carried out by another entity on behalf of the closed ended fund, that entity is) subject to national regulation for the purpose of investor protection.

    Appendix A sets out some of the principles used in considering the equivalence of corporate governance mechanisms for contractual type closed-ended funds.

    A UCITS may not make investment in closed ended funds for the purposes of circumventing the normal UCITS investment limits.
  4. Structured Financial Instruments

    Structured financial instruments can also be eligible for investment as "transferable securities" where they are financial instruments which:

    1. fulfill the criteria set out "(ii) Clarification by Eligible Assets Directive" above;
    2. are backed by, or linked to the performance of, other assets, which may differ from those referred to in Regulation 68 (1) of the UCITS Regulations; provided that where a financial instrument covered by this subparagraph contains an embedded derivative component, the requirements regarding the derivatives risk management process, global exposure and aggregation of direct and indirect exposures shall apply to that component.

B. Money Market Instruments

The term "money market instruments" refers to instruments normally dealt in on the money market which are liquid, and have a value which can be accurately determined at any time. UCITS can invest in money market instruments admitted to trading/dealt in on a regulated market and in money market instruments which are not admitted to or dealt in on a regulated market.

  1. Instruments normally dealt in on the Money Market

    The reference to money market instruments as "instruments normally dealt in on the money market" shall be understood as a reference to financial instruments which fulfil one of the following criteria:

    1. they have a maturity at issuance of up to and including 397 days;
    2. they have a residual maturity of up to and including 397 days;
    3. they undergo regular yield adjustments in line with money market conditions at least every 397 days;
    4. their risk profile, including credit and interest rate risks, corresponds to that of financial instruments which have a maturity as referred to in subparagraphs (i) or (ii), or are subject to a yield adjustment as referred to in subparagraph (iii).

  2. Instruments which are liquid

    The reference to money market instruments as "instruments which are liquid" shall be understood as a reference to financial instruments which can be sold at limited cost in an adequately short time frame, taking into account the obligation of the UCITS to repurchase or redeem its units at the request of any unit holder.

    Appendix A sets down the factors to be taken into account at both the instrument and fund level in assessing liquidity.
  3. Instruments which have a value which can be accurately determined at any time

    The reference to "money market instruments as instruments which have a value which can be accurately determined at any time" shall be understood as a reference to financial instruments for which accurate and reliable valuations systems, which fulfil the following criteria, are available:

    1. they enable the UCITS to calculate a net asset value in accordance with the value at which the financial instrument held in the portfolio could be exchanged between knowledgeable willing parties in an arm's length transaction;
    2. they are based either on market data or on valuation models including systems based on amortised costs.

    With respect to the criterion "value which can be accurately determined at any time", if the UCITS considers that an amortisation method can be used to assess the value of a money market instrument, it must ensure that this will not result in a material discrepancy between the value of the money market instrument and the value calculated according to the amortisation method as set out in UCITS Notice I7 – Money Market Funds.

    More detail on liquidity requirements and on governmental issues and issues by securitisation vehicles can be found in Appendix A.

To read "A Guide to UCITS in Ireland" in full, please click here.

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