European Union: ESMA Discussion Paper On UCITS Share Classes - April 2016

Last Updated: 15 April 2016
Article by Jennifer Fox


On 6th April, 2016 the European Securities and Markets Authority ("ESMA") published a discussion paper on UCITS Share Classes (the "Discussion Paper"), following on from its earlier consultation on different share classes of UCITS (December 2014).

ESMA is now proposing the development of a common framework throughout the EU for the operation of share classes within UCITS based on a series of high level principles to be followed when setting up different share classes together with a set of supporting operational principles.

ESMA is seeking detailed feedback (by 6th June, 2016) on whether and how share classes can actually work under the principles it has outlined.

The full text of ESMA's Discussion Paper may be accessed here.

High-level Principles

ESMA has identified the following four high-level principles that should be followed when setting up different share classes within a UCITS fund:-

1. Common investment objective; share classes of the same fund should have a common investment objective reflected by a common pool of assets.

ESMA has recognized that there are many examples of share classes which provide investors with different features where, as the performance of the investor as such is not modified by the characteristics of those share classes, they share a common investment objective. Examples it has given include retail -v- institutional, means of investment, management fees, minimum subscriptions, voting rights, currency.

The key issue with ESMA's paper in this context is what it has said about how to approach the meaning of "common investment objective" where classes are set up with a derivative hedge or overlay. ESMA feels that it could lead to such classes having a risk profile (and therefore an investment objective) which would no longer be in line with the investment objective in the fund.

However, of particular note is ESMA's statement that it regards currency hedging at share class level as compatible with the principle of a common investment objective. In this regard, ESMA is also of the view that hedging should be understood as coming within the parameters as set out in its Guidelines on Risk Measurement1, i.e. that the hedging arrangement should not aim to generate a return, there should be a verifiable reduction of risk at the level of the UCITS, the risks relating to derivatives should be offset, should relate to the same asset class and should be efficient in stressed marked conditions.

2. Non-Contagion; UCITS management companies should implement appropriate procedures to minimise the risk that features are specific to one share class could have a potentially adverse impact on other share classes of the same fund.

ESMA has given a very useful, simple summary of the potential contagion or spillover implications for investors where class level derivative overlays are used. It has reminded stakeholders of the lack of asset segregation at class level, if the potential counterparty and operational rights are assumed by all investors in the class (i.e. not just those in the class which "uses" the hedge) and highlights the principal sources of contagion risk.

Importantly, (perhaps sometimes overlooked we think) it recognizes that these risks cannot be eliminated but can be mitigated by applying operational principles.

Accordingly, ESMA has proposed a set of operational principles which it considers, should be the minimum standard applicable to share classes with a derivative overlay which are as follows:

  • the notional of the derivative should not lead to a commitment to deliver or receive securities with a value that cannot be serviced by that portion of the portfolio represented by the share class;
  • a level of operational segregation should be put in place to ensure a clear identification of assets/liabilities and profit and loss to the respective share class(es) on an ongoing basis and at the very least, at the same valuation frequency of the fund;
  • the implementation of stress tests to quantify the impact of losses on all share classes due to loss in a hedged share class;
  • evidence on an ex-ante basis that the implementation of the derivative overlay will lead to a share class which better aligns with the specific risk profile of the investor;
  • the derivative overlay should be implemented according to a detailed, pre-defined and transparent hedging strategy.

In addition, EMSA has also recommended adherence to a number of exposure limits. These involve, inter alia: (a) that exposure to the counterparty is in line with the UCITS limits; (b) that overhedged positions do not exceed 105% of the NAV of the share class with underhedged positions not falling short of 95% of the NAV of the share class; (c) that overhedged/underhedged positions are monitored; and (d) the incorporation of a procedure to reset the hedging arrangements on a regular basis so as to ensure the position stays within the permitted position levels and is not carried forward from month to month.

In fact, it is worth noting that the exposure limits as set out above are already imposed by the Central Bank of Ireland in respect of hedged share classes.

Of particular interest, is the statement made by ESMA that whilst it believes that currency hedged share classes can operate in line with these principles it doubts that duration risk, hedged or volatility risk hedged classes can be seen as compatible with these operating principles as it states "that they may not be implemented according to a detailed, pre-defined and transparent strategy."

3. Predetermination; all features of the share class should be predetermined before it is set up.

With regard to the above principle, ESMA is of the opinion that any form of discretion on the part of the UCITS management company (i.e. after the hedged class is set up) with regard to hedging mechanisms would contravene this principle of predetermination.

4. Transparency; differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.

With regard to hedged share classes with derivative overlays and associated counterparty and operational risks, ESMA is of the view that new and existing investors in a UCITS should be informed about the creation and existence of such share classes in a timely fashion through periodic reporting. Further, information should be provided through the fund's prospectus. The UCITS management company should also keep a list of share classes in the form of readily available information with regard to share classes with a contagion risk and stress tests should be made available to national competent authorities on a regular basis.

ESMA has also stated that share classes should never be set up to circumvent the rules of the UCITS Directive on diversification derivatives eligibility and liquidity.

Impact on Existing Share Classes

ESMA acknowledges that the introduction of the framework for share classes at EU level based on the principles outlined in the Discussion Paper could have a considerable impact on fund promoters in member states where share class arrangements may contravene such principles With this in mind, ESMA has acknowledged that transitional provisions would have to be introduced and as part of its consultation, has sought feedback from stakeholders on what kind of transitional provisions would be necessary.

ESMA has not clarified what type of instrument it might issue on the topic of share classes but notes that it is probable that it could lead to an ESMA opinion addressed to EU institutions or national competent authorities.


The Discussion Paper sets out 21 questions for stakeholders to consider with a deadline for responses on 6th June, 2016.

We would like to emphasise the importance for fund promoters with multi-class UCITS funds to consider this Discussion Paper. In particular, the principles and operational framework proposed would be of relevance to all promoters currently offering hedged share classes who will have an opportunity to comment on the practicality and feasibility of such proposals.

The consultation will also be of particular interest to fund promoters offering duration/interest rate or volatility risk hedged share classes. Noting that the Central Bank of Ireland permits interest rate hedging at share class level on the basis provided they comply with specific regulatory parameters (see Guidance on "UCITS and AIF Share Class hedging"); the Discussion Paper presents a real opportunity for such promoters to present their case that interest rate/duration hedged share classes can comply with the high-level principles and have been operating within a well established regulatory framework in Ireland.

Dillon Eustace will be preparing a response to the Discussion Paper ahead of the 6th June, 2016 deadline and should you wish to provide any comments on the Discussion Paper to ESMA we would be happy to incorporate them.

Please forward any feedback you may have on the ESMA proposals to your usual contact at Dillon Eustace.


1 CESR's Guidelines on Risk Management and the Calculation of Global Exposure and Counterparty Risk for UCITS – CESR/10-788

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

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

In association with
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
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 you may opt out by clicking here

    Terms & Conditions and Privacy Statement (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

    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’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.


    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.


    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.

    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 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.


    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.


    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.


    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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

    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

    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

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

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