Ireland: Funds Quarterly Legal And Regulatory Update: 1 January 2017 – 31 March 2017

Last Updated: 13 April 2017
Article by Breeda Cunningham and Michele Barker

Most Read Contributor in Ireland, July 2017


(i) Feedback Statement on CP 105 – Consultation on amendments to the Central Bank UCITS Regulations

On 19 January 2017, the Central Bank published its feedback statement on CP 105 – Consultation on amendments to the Central bank UCITS Regulations (the "Feedback Statement").

CP 105, originally published on 2 June 2016, relates to a number of amendments to the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "Central Bank UCITS Regulations"): (a) arising as a result of the implementation of UCITS V; and (b) technical changes, including corrections of typographical errors, identified after the Central Bank UCITS Regulations were published.

The feedback statement summarises the responses received to the three specific questions raised in CP 105 along with the Central Bank's comments and decisions.

Question 1: Stakeholders were requested to indicate whether they agree with the changes as currently proposed and to provide observations. In addition, stakeholders were requested to indicate whether further amendments may be required as a result of the implementation of UCITS V.

Regarding the proposal to include the Central Bank's requirements in respect of establishing subsidiaries, the Central Bank advises as follows:

  • Provisions in relation to the establishment/use of subsidiaries are included in the UCITS Regulations – Regulation 74(3) subparagraphs (d) and (e). Similar to the approach taken for alternative investment funds, the Central Bank will issue guidance on their website in relation to applying to the Central Bank for approval to establish a subsidiary; and
  • The Central Bank agrees that requiring disclosure of the names of subsidiaries in the prospectus may not be practical. The amending Regulations will reflect a revised provision requiring disclosure in the UCITS annual report.

Regarding the proposal of inserting a new Regulation 114A applying the depositary's safekeeping obligations where assets of the UCITS are held through subsidiaries, the Central Bank will amend the typographical error in Regulation 114A to refer to Article 14 (rather than Article 15) of Commission Delegated 438/2016.

Where assets are held through a subsidiary, the Central Bank considers these as being the UCITS' assets which should be protected in the same manner as assets held directly by the UCITS. UCITS V Level 2 contains depositary obligations regarding monitoring "all cash of the UCITS". The Central Bank views this as including the UCITS' cash held through a subsidiary and consequently the depositary's cash flow monitoring duties should apply to UCITS' cash held through the subsidiary. For clarity Regulation 114 A will be further amended to provide that where a UCITS establishes a subsidiary, the assets of the subsidiary must be held by the depositary and the depositary's safekeeping and cash monitoring obligations shall apply.

Question 2: Stakeholders were requested to indicate whether they agree with the changes as currently proposed and to provide observations. Examples include:

  1. A proposal to amend Regulation 36 to reflect the fact that valuation of a particular asset type of a UCITS may be mandated by legislative requirements other than those in the Central Bank UCITS Regulations (e.g. valuation of OTC derivatives not cleared by a CCP in accordance with Regulation (EU) No 68/2012 (EMIR)); and
  2. A proposal to amend Regulation 53(2)(b) to permit a responsible person more flexibility in providing disclosure for long and short positions.

The Central Bank has considered these items and advises as follows:

  1. Regulation 36/Schedule 5 is not being amended. However, the Central Bank will issue a Q&A to clarify that valuation of a particular type of a UCITS may be mandated by legislative requirements other than those in the Central Bank UCITS Regulations. In such circumstances those particular assets should be valued in accordance with the relevant legislative requirements.
  2. The Central Bank intends to amend Regulation 53(2)(b) to give the responsible person more flexibility to provide for disclosure of long and short positions. The new provision will permit disclosure on the basis of the anticipated maximum percentage or anticipated ratio of long positions to short positions.

Question 3: The Central Bank is considering whether the requirements in relation to disclosure of open derivative positions in annual and half-yearly reports might be amended, particularly in circumstances where the disclosure can be lengthy and technical in nature.

Further to comments received, the Central Bank will amend the Central Bank UCITS Regulations to include a new provision incorporating the proposed option to present either a full portfolio statement listing each open financial derivative position or a condensed portfolio statement listing open positions representing 5% or more of assets.

However, where a condensed portfolio statement is provided the Central Bank considers that the introduction of an additional leverage metric could improve disclosure in terms of making it more informative. The leverage metric should be consistent with the leverage measure as used by the UCITS (i.e. sum-of-the-notionals or commitment methodologies) per its risk management process. However, for the purposes of the condensed portfolio statement the leverage is to be analysed (delineated) within each of the following headings: each derivative type, each derivate type by currency and maturity, each derivative type by industry sector and each derivative type by geographic region.

In addition, the Central Bank sought feedback on a number of technical amendments.

The Central Bank will proceed to amend the Central Bank UCITS Regulations to give effect to the changes described in the feedback statement as well as changes resulting from the consultation process on fund management company effectiveness ("CP 86"). While it was anticipated that the revised Central Bank UCITS Regulations would be published in first quarter of 2017, to date they have not been published.

A copy of the feedback statement is available at the following link:

(ii) ESMA issues Opinion on UCITS Share Classes

On 30 January 2017, the European Securities and Markets Authority ("ESMA") published an Opinion in relation to the differences which can exist between different types of units or shares within the same UCITS fund, with ESMA identifying differing approaches in different Member States. In order to address such differences, ESMA included four criteria UCITS must follow when setting up different share classes. The publication of such criteria is envisaged to create increased harmonisation across the EU in this area. The four criteria are summarised as follows:

Common investment objective: A common investment objective should exist among all the share classes within the same UCITS. Hedging arrangements, with the exception of currency risk, are non-compatible with having a common investment objective as per the ESMA Opinion;

Non-contagion: ESMA notes that UCITS management companies should have in place procedures whereby a risk which is pertinent to one share class cannot have a potential adverse effect upon a differing share class. ESMA notes that although such risks cannot be fully eradicated, the carrying out of various tasks serves to lessen the likelihood of such potential adverse effects. Such tasks include stress testing, monitoring payment and delivery obligations and having in place a detailed, pre-defined and transparent hedging strategy;

Pre-determination: All elements of the share class should be identified and determinable before the fund is set up; and

Transparency: Information regarding differences in share classes within the same fund should be made available to investors when a choice of two or more classes exists.

All new funds which have share classes will be required to adhere to the criteria set out in the Opinion.

For existing funds which have share classes and do not currently comply with the provisions of the Opinion there is a transitional period for the implementation of the criteria as set out in the Opinion. However, where a fund retains existing share classes which fall foul of the Opinion such share classes must be closed to investment by new investors by 30 July 2017 and closed to additional investment by existing shareholders by 30 July 2018.

ESMA's full Opinion is available at the following link:

(iii) Central Bank publishes updated UCITS Q&A

On 13 March 2017, the Central Bank published the sixteenth edition of its Q&A on UCITS Regulations.

The amended Q&A include changes in relation to transitional arrangements following the publication of the Central Bank (Supervision and Enforcement Act) 2013 (Section 48(1)(Investment Firms) Regulations 2017 ("CBI IF Regulations").

The updated Q&A is available at the following link:

To read this Update in full, please click here.

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.

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