Ireland: Exchange-Traded UCITS In Ireland

Last Updated: 31 July 2015
Article by Kevin Murphy, Adrian Mulryan, Sarah Cunniff and Dara Harrington
Most Read Contributor in Ireland, October 2018

Arthur Cox established the first Irish ETF in 1998 and continues to advise multiple ETF clients. Ireland is home to 50% of all ETFs in Europe and is increasingly the domicile of choice for new ETF launches. The market for exchange-traded products in Europe is more fragmented than other ETF markets such as the US. Our extensive involvement with ETFs allows us to assist our clients in preparing for the launch and sale of ETFs in Europe.

The European ETF market is undergoing a material increase in growth. In excess of US$260 billion of assets are currently held in Irish domiciled ETFs and commentators have projected this to reach $500 billion by 2020. Growth is occurring across all ETF asset classes and on a pan-European basis. ETFs are outperforming traditional mutual funds in terms of asset capture. This is driven by multiple factors which include:

  • changes to European remuneration policies restricting the use of rebates;
  • investor acceptance of the product type;
  • a preference for greater liquidity and transparency in European funds;
  • AIFMD making access to US ETFs more difficult; and
  • acceptance of UCITS ETFs in the Asian markets.

The purpose of this briefing is to provide information on Ireland as a leading domicile for ETFs.

ESTABLISHMENT

In Europe ETFs are typically structured as investment companies established as undertakings for collective investment in transferable securities ("UCITS"). These are funds established under the regulations implementing the EU's UCITS Directive. UCITS are very much recognised as a global funds brand and can be passported for sale throughout the EU and in many other jurisdictions.

The second category of regulated investment fund in Ireland comprises alternative investment funds ("AIFs"). These funds are subject to the regulations implementing the EU's Alternative Investment Fund Managers Directive ("AIFMD"). The London Stock Exchange has announced plans to facilitate the listing of AIFs however we have yet to see an AIF ETF list and trade. This briefing, therefore, focuses on the establishment of Irish domiciled UCITS ETFs.

A fund may be established in Ireland as a single fund or as an umbrella fund comprising one or more sub-funds, each with a different investment objective and policy. An umbrella fund may have multiple sub-funds with exposure to different indices or asset types and provides a simple and cost effective solution for establishing and adding new sub-funds over time. A sub-fund may comprise different classes of shares. Typically classes of shares are issued to allow for different fee arrangements, different subscription amounts and/ or different currencies within the same sub-fund. UCITS ETFs are typically established as umbrella funds with different currency classes. Irish UCITS ETFs organised as umbrella funds provide for segregated liability between their sub-funds as a matter of law.

APPROVAL, REGULATION AND SUPERVISION OF UCITS ETFS

The Central Bank is the regulatory authority responsible for the approval and supervision of all regulated investment funds in Ireland. All promoters, investment managers and discretionary investment advisers must be approved to act as such by the Central Bank. This approval process involves submitting to the Central Bank an application form and sufficient background information to enable the Central Bank to be satisfied that the applicant has the appropriate personnel, experience, financial resources and regulatory status to perform the role.

The UCITS ETF's prospectus, constitutional document and various service provider documents must be submitted to the Central Bank for review and approval. A UCITS ETF is typically approved by the Central Bank within six to eight weeks from the date of submission of the documents, depending on the complexity of the fund structure. Any amendments to these fund documents are also subject to prior approval by the Central Bank. A UCITS ETF must also produce for investors a pre-contractual document known as a key investor information document ("KIID"). The rules on the length and content of, and language used in, the KIID are prescriptive.

Each ETF is required to have a minimum of two Irish resident directors appointed to its board of directors. The Central Bank must approve all appointments to the board of directors in advance. Any proposed director must meet the fitness and probity standard in that the director must be fit and proper which means the director must be (i) competent and capable, (ii) honest and demonstrate integrity, fairness and ethical behaviour and (iii) be financially sound.

The day-to-day management and control of the ETF is provided by the board of directors. The board of directors may delegate certain duties to third parties (e.g. investment management, administration and custodial functions) but the ultimate responsibility to ensure that the UCITS is managed in the best interests of the shareholders remains with the ETF board.

ICAV

It is expected that UCITS ETFs may also be established in the form of the new Irish Collective Asset Management Vehicle ("ICAV"). The ICAV is a corporate entity (that has a similar structure to the SICAV as used in other European jurisdictions) and operates outside of the Companies Acts in Ireland. A similar vehicle, known as the OEIC, is available in the UK.

The main advantage of the ICAV is that, if it elects to do so, it may meet the US "check the box" taxation rules. The ICAV can elect in its classification under the U.S. "check the box" taxation rules to be treated as a transparent entity for U.S. federal income tax purposes which will allow U.S. taxable investors to avoid certain adverse tax consequences that would normally apply to "passive foreign investment" companies.

Traditionally, Irish ETFs have been authorised as public limited companies and are required to comply with many of the rules applicable to non-investment fund type public companies – these rules have been particularly burdensome for ETFs. For an ICAV there is no requirement to hold an AGM, no need for shareholder votes on non-material changes to the constitutional document and separate sets of accounts may be prepared at the level of each sub-fund.

PERMITTED INVESTMENTS

UCITS are subject to a number of investment restrictions which provide for diversification of a fund's portfolio. One key diversification requirement is the "5/10/40" rule. A UCITS is precluded from investing more than 10% of its assets in any one issuer. Where the fund invests more than 5% of its assets in any issuer the maximum amount of such holdings in excess of 5% is limited to 40% of the net asset value of the UCITS. However, index tracking funds, such as ETFs, can avail of more generous exposure limits with the prior approval of the Central Bank.

INDEX-TRACKING UCITS ETFS

UCITS ETFs are mainly passive funds which replicate an index. The rules around indices are of particular interest to promoters of ETFs. An index used by a UCITS ETF must be sufficiently diversified; represent an adequate benchmark for the market to which it refers; be published in an appropriate manner and be independently managed from the management of the UCITS. The prospectus for an index-tracking UCITS ETF must specifically address four matters (in addition to all other relevant Central Bank requirements). It should contain:

  • a clear description of the index that is to be tracked (including details of its underlying components). It is permissible for the prospectus to direct investors to a website where the composition of the tracked index is published;
  • information on how the index will be tracked (for example, whether it will follow a full replication or sample-based physical model or a synthetic replication) and the implications of the chosen tracking method in terms of investor exposure to underlying and counterparty risk. This information must also be summarised in the UCITS' KIID;
  • a description of the factors that are likely to affect the index-tracking UCITS' ability to track the performance of the index; and
  • information on the anticipated level of tracking error in normal market conditions.

There are additional disclosure requirements in the financial statements for UCITS ETFs. The annual and half-yearly reports of an index-tracking UCITS ETF must state the size of the tracking error as at the end of the period under review. The annual report should also disclose and explain any divergence between the performance of the UCITS ETF and the performance of the index tracked.

FINANCIAL INDICES

A UCITS ETF cannot invest in a financial index which has a single component that has an impact on the overall index return which exceeds the relevant diversification requirements, i.e., generally 20% or, where justified by exceptional market conditions, 35%. Investments in commodity indices that do not consist of diversified exposures are also restricted. For these purposes sub-categories of the same commodity (e.g., from different regions or markets derived from the same primary products industrialised process) are not considered to be the same commodity unless those sub-categories are highly correlated.

A UCITS ETF seeking to invest in an eligible financial index must carry out appropriate due diligence on the eligibility of the index and document this. This due diligence should take into account whether the index methodology contains an adequate explanation of the weightings and classification of the components on the basis of the investment strategy. The due diligence should also consider matters relating to the index components.

As part of the due diligence process the UCITS ETF should also assess the availability of information on the index including whether there is a clear narrative description of the benchmark, whether there is an independent audit of the index and the scope of such an audit and whether the frequency of index publication will affect the ability of the UCITS to calculate its net asset value. The UCITS ETF should also ensure that the index is subject to independent valuation.

ACTIVE UCITS ETFS

There is growing interest in ETFs providing actively managed strategies (i.e. which do not track an index), whereby the manager has discretionary control of asset allocation. Those considering active ETFs need to consider the impact of portfolio transparency as it relates to matters of market abuse, the need to protect proprietary information, and the need for intra-day market making in assessing the suitability of an actively managed investment strategy for exchange trading.

CREATION MECHANICS

The essential difference between an ETF and a mutual fund is that the ETF is traded on an exchange like a share. In order to facilitate UCITS EFTs trading on exchange a third party, commonly known as an authorised participant, subscribes for ETF shares with the ETF and this is known as the primary market. The authorised participant will subscribe for shares either in cash or in specie (i.e. by providing a creation basket referencing the underlying holdings of the reference index or strategy). In Europe funds can use derivatives to achieve exposure to the underlying holdings in which case the creations are cash settled.

SECONDARY MARKET

The ETF shares purchased by authorised participants are then available for purchase by investors from the authorised participants in smaller amounts in the secondary market. Where shares of a UCITS ETF are purchased on a secondary market (e.g. on exchange) are generally not redeemable from the fund, the prospectus and marketing communications of the UCITS must contain a specific warning about how the secondary market operates and the implication of trading fees or market pricing on returns.

Secondary market investors must have a right to sell shares directly back to the UCITS ETF in circumstances where the stock exchange value of the shares significantly varies from its net asset value (e.g., in cases of market disruption such as the absence of a market maker). The process and potential costs involved in such a redemption must be disclosed by the UCITS ETF in its prospectus.

UCITS ETF - NAMING CONVENTION

Every UCITS ETF must contain the identifier 'UCITS ETF' in its name and in its fund rules or instrument of incorporation, prospectus, KIID and marketing communications.

LISTING AND TRADING

Irish ETFs are most commonly traded on one or more of: London Stock Exchange, Euronext (Paris/Amsterdam), Borsa Italiana, SIX Swiss Exchange and XETRA (segment of Deutsche Borse). Arthur Cox has one of the largest listing teams in Dublin and can assist with this process. Ireland, through the Irish Stock Exchange, benefits from admission to trading rights on the London Stock Exchange. The costs of listing are generally not significant however ease of settlement and the cost of market making vary on a market by market basis.

TAXATION

A UCITS ETF authorised by the Central Bank is not subject to Irish tax of any kind. Certain Irish resident investors are chargeable to Irish tax on transfers or redemptions of shares or payments of dividends.

CONCLUSION

The process for launching a UCITS ETF in Ireland is well established. Some of the key drivers on why Ireland is a leader in ETFs are:

  • Mature industry. The first Irish ETF was launched in 1998;
  • Ireland has 50% of the European ETF market;
  • Strength and depth in custody and administration services in Ireland;
  • No Irish CGT, income or annual net asset tax for ETFs;
  • Access to a strong double tax treaty network;
  • Eurozone, English speaking country; and
  • Home to over 900 fund promoters.

We are delighted to assist promoters as they assess Ireland as a domicile, or Europe more generally as a market, for exchange-traded products. If you have any queries on this briefing or require any further details on any aspect of ETFs please do not hesitate to contact a member of our team.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions