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
- 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;
- 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":
- the potential loss which the UCITS may incur with respect to holding those instruments is limited to the amount paid for them;
- their liquidity does not compromise the ability of the UCITS to comply with its obligation to provide at least fortnightly redemption facilities;
- reliable valuation is available for them as follows:
- 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;
- 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;
- appropriate information is available for them as follows:
- 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;
- 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;
- they are negotiable;
- their acquisition is consistent with the investment objectives or the investment policy, or both, of the UCITS;
- their risks are adequately captured by the risk management
process of the UCITS.
- 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:
- they fulfill the criteria set out in "(ii) Clarification by Eligible Assets Directive" above;
- they are subject to corporate governance mechanisms applied to companies or equivalent to those applied to companies;
- 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.
A UCITS may not make investment in closed ended funds for the purposes of circumventing the normal UCITS investment limits. - Structured Financial Instruments
Structured financial instruments can also be eligible for investment as "transferable securities" where they are financial instruments which:
- fulfill the criteria set out "(ii) Clarification by Eligible Assets Directive" above;
- 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.
- 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:
- they have a maturity at issuance of up to and including 397 days;
- they have a residual maturity of up to and including 397 days;
- they undergo regular yield adjustments in line with money market conditions at least every 397 days;
- 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).
- 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. - 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:
- 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;
- they are based either on market data or on valuation models
including systems based on amortised costs.
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.
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.