Ireland: Central Bank Of Ireland Publishes UCITS Regulations

On 5 October 2015, the Central Bank of Ireland (the "Central Bank") published new regulations setting out the Central Bank requirements applicable to undertakings for collective investment in transferable securities ("UCITS").  The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "CB UCITS Regulations") supplement existing legislative requirements (in particular, the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011) and, together with guidance published on the Central Bank website and the UCITS Q&A, replace the rules and guidance previously set out in the Central Bank's UCITS Notices and Guidance Notes.  The publication of the CB UCITS Regulations follows a consultation issued by the Central Bank in January 2014 and is accompanied by a feedback statement summarising the responses received.

Background

Following the introduction of the AIF Rulebook as part of the implementation of the Alternative Investment Fund Managers Directive ("AIFMD"), the Central Bank indicated that it would adopt a similar approach in respect of UCITS and would consolidate into one document all of the conditions which the Central Bank imposes on UCITS, their management companies and depositaries.  The Central Bank consulted on this proposal in its "Consultation on Publication of UCITS Rulebook" (CP77) which outlined the Central Bank's approach, included a draft of the new proposed UCITS Rulebook, and raised specific queries in relation to proposals regarding the promoter regime, Central Bank approval of regulated markets and semi-annual reporting for UCITS management companies.

The Central Bank has decided to publish the requirements applicable to UCITS in the form of a statutory instrument rather than a "UCITS Rulebook" under relatively new regulation-making powers conferred on the Central Bank by the Central Bank Supervision and Enforcement Act 2013.  This new procedure has been adopted for implementation of regulation in other financial sectors and the Central Bank has indicated that using regulations is its preferred approach, as it is intended to assist fund providers by bringing additional clarity and certainty to the rules applied by the Central Bank.  The Central Bank has indicated that it will shortly commence a review of the Central Bank's AIF Rulebook to see whether it should also be issued as Central Bank regulations.

Amendments to Central Bank Conditions

The CB UCITS Regulations introduce a number of amendments to the conditions previously set out in the UCITS Notices.  The key changes are as follows:

Codification of Existing Derogations

One of the most significant changes effected by the CB UCITS Regulations is the codification of any derogations previously granted by the Central Bank in relation to individual requirements.  The Central Bank believes that its review process has allowed it to identify any such derogations and to ensure that they are included.  If a particular derogation has not been included in the CB UCITS Regulations, the relevant UCITS will need to re-apply for such derogation.  The Central Bank has emphasised on a number of occasions that it retains the authority to grant derogations from the provisions of the CB UCITS Regulations.

While the Central Bank has endeavoured to ensure that all existing derogations are provided for in the CB UCITS Regulations, each UCITS will now need to consider its current offering documents and operating procedures, together with its authorisation file, in order to determine whether any derogations were obtained which are not provided for in the CB UCITS Regulations and to re-apply for such derogation if necessary.  Matheson are of course happy to assist our clients with this analysis and any such applications.

Removal of Promoter Approval Requirement

Following the approach adopted in respect of alternative investment funds in the AIF Rulebook, the requirement for UCITS to have approved promoters has been removed.  The Central Bank will instead place reliance on the regulatory regimes for UCITS management companies and it has elaborated on the obligations of directors in circumstances where a UCITS gets into difficulties.  This is a welcome development and follows the approach adopted by the Central Bank in implementing the AIFMD.

Guidance on Regulated Markets

The Central Bank has withdrawn Guidance Note 1/96, which set out its approach to the determination of whether a market met the criteria for "regulated markets" upon which transferable securities or financial derivative instruments must be listed or traded in order to be an eligible investment for a UCITS.  This withdrawal is on the basis that there is a degree of overlap between that guidance note and the UCITS eligible assets directive.  The Central Bank will no longer review submissions on proposed regulated markets and will no longer publish a list of permitted markets for UCITS. It will therefore be for the UCITS to determine whether a particular market meets the relevant criteria set out in the CB UCITS Regulations, which may provide additional flexibility to UCITS.

Financial Reporting Requirements

The Central Bank has extended the financial reporting requirements by requiring UCITS management companies and depositaries to submit half-yearly management accounts covering the second six months of the financial year (in addition to the requirement to submit half yearly management accounts covering the first six months of the financial year, as applied to date).  The Central Bank is of the view that this change will provide it with more complete and timely information, allowing it to compare and analyse reports from the first six months of the year with the second six months and providing more timely key risk indicators and alerts on PRISM, the Central Bank's risk-based framework for the supervision of regulated firms.

Collateral Diversification

The CB UCITS Regulations contain provisions which reflect the outcome of the Central Bank's July 2014 consultation on the adoption of the European Securities and Markets Authority ("ESMA") revised guidelines on ETFs and other UCITS issues ("CP84").  ESMA's revised guidelines provide for a derogation from the collateral diversification requirement where collateral consists of securities issued or guaranteed by a member state, one or more of its local authorities, a third country or public international body to which one or more member states belong.  The derogation applies to all UCITS, subject to additional disclosure requirements applicable to the prospectus and periodic reports of UCITS who avail of the derogation.

The CB UCITS Regulations include provisions designed to mitigate the risks the Central Bank perceives in applying the derogation to all UCITS and builds upon the existing obligation on UCITS management companies to perform a credit assessment set out in the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 by identifying a specific credit quality threshold.

The CB UCITS Regulations provide that collateral received should be of "high quality".  In assessing whether collateral is of high quality, the UCITS management company must ensure that, where the issuer was subject to a credit rating by an agency registered and supervised by ESMA, that rating must be taken into account.  Where an issuer is downgraded below the two highest short-term credit ratings by the credit rating agency, the management company must conduct a new credit assessment of the issuer without delay.  This revised rule is based on the formulation set out in ESMA's opinion on the review of the ESMA guidelines on a common definition of money market funds, meaning that the threshold applied by a UCITS in its credit assessment of collateral issuers is the standard which applies to investments by a UCITS MMF.

Further guidance in relation to the matters which should be taken into consideration in a credit assessment process and also practice which should be followed when there is a deterioration in credit quality have been incorporated in the UCITS guidance published on the Central Bank's website.

US OTC Derivative Counterparties

The UCITS Notices set out a list of entities which are eligible to act as counterparties to a UCITS in OTC derivative trades.  This list includes credit institutions and MiFID firms and goes on to capture any US entities by referring to an entity subject to regulation as a Consolidated Supervised Entity ("CSE") by the Securities and Exchange Commission in the US.  However, due to changes in the US regulatory framework, the CSE test has become inapplicable to broker-dealers in the US.  Accordingly, during the consultation period, industry engaged with the Central Bank to amend this list.  The CB UCITS Regulations refers, in addition to credit institutions and MiFID firms, to a group company of an entity issued with a bank holding licence from the Federal Reserve, where that group company is subject to consolidated supervision by the Federal Reserve.

The CB UCITS Regulations address the status of clearing houses, where central clearing is mandated under the European Market Infrastructure Regulation ("EMIR"), by providing that, where an OTC derivative is subject to novation, the counterparty after the novation must be one of the three entities referred to in the preceding paragraph, a central counterparty authorised or recognised under EMIR or, pending recognition by ESMA under EMIR, an entity classified by the SEC as a clearing agency or by the Commodities Futures Trading Commission as a derivatives clearing organisation.

It is worth noting that the CB UCITS Regulations do not provide for a higher limit in respect of counterparty exposure to a clearing house.  In this regard, the Central Bank has stated in its feedback statement on CP77 that ESMA has addressed this point in its Opinion 2015/ESMA/880 dated 22 May 2015 and considered that an amendment to the UCITS Directive may be required in order to raise the relevant exposure limit.

Investment in Indices through Financial Derivative Instruments

The Central Bank currently permits a UCITS to hold a financial derivative instrument ("FDI") in respect of a financial index comprised of eligible assets with concentration levels in excess of those permitted under the UCITS Regulations, provided that, by applying a look-through approach, the consolidated holdings held through the index, together with direct holdings, comply with the risk spreading requirements of the UCITS Regulations.   This position is amended by the CB UCITS Regulations so that each individual underlying financial index will need to be assessed against UCITS concentration limits.

Prospectus Requirements

The Central Bank has consolidated in the CB UCITS Regulations all of the rules relating to the prospectus, which are now located together whereas in the UCITS Notices these rules were located across a number of different Notices.  One change introduced is a new requirement that where a UCITS proposes to take short positions, it must disclose in its prospectus, in relation to each of the categories of assets in which it may invest, whether it will take long or short positions or both.  It must also disclose the percentage of its assets which it anticipates will be invested in long positions and short positions.  This disclosure requirement is more detailed than was previously the case and it will remain to be seen how investment managers will be required to address this level of detail in fund documents.

Reporting of Non-Material Breaches

The CB UCITS Regulations introduce a new requirement for depositaries to report to the Central Bank non-material breaches which remain unresolved for four weeks, on the basis that this is a reasonable period within which to resolve any breach and it would be concerned to be aware of instances where this is not the case.  The Central Bank will keep the operation of this rule under review to ensure that it is workable and proportionate.

Next Steps and Transitional Provisions

The CB UCITS Regulations will apply from 1 November 2015.  There are transitional provisions in respect of certain requirements dealing with redemption gates so that those requirements will not apply until 2 November 2016.  The prospectus disclosures required where a UCITS enters into short positions as part of its investment policy should be included in the prospectus when it is next updated.

Comment

The consolidation of the Central Bank requirements applicable to UCITS into a single document is a practical and welcome development, together with the removal of the promoter approval requirement and the clarification relating to US OTC counterparties.  UCITS managers will need to consider whether they need to apply for permission to retain existing derogations and to ensure that the current prospectus disclosures, some of which may be in place for an extended period, meet the updated disclosure requirements.  As part of our continuing engagement with the Central Bank through industry and directly on behalf of our clients, we will seek further clarity on the timeline for filings, if any, required as a result of this analysis.  We are happy to share relevant feedback with clients as it is made available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.