The European Securities and Markets Authority published on January 9 its latest guidelines on ETFs and other UCITS issues for regulators and UCITS management companies.
The guidelines, published in Q&A format and based on questions posed by both regulatory authorities and members of the industry, are designed by ESMA to encourage harmonisation of supervisory approaches and practices in the application of the UCITS directives and their implementing measures.
The latest additions to the guidelines deal with financial derivative instruments and collateral management. ESMA says that in cases where the role of a counterparty to a derivative instrument only involves implementing a set of rules agreed in advance with the UCITS management company and does not allow the exercise of any discretion, the counterparty should not be considered to have any discretion over the composition of the underlying assets of the instrument.
This contrasts with cases where the counterparty to the derivative can decide on the composition of the underlying of the derivative instrument or the UCITS investment portfolio without the prior consent of the management company.
ESMA says a counterparty offering advice to the management company on the composition of the underlying of the derivative or the UCITS' investment portfolio should not be considered to have discretion over the composition of the underlying of the derivative provided that the management company expressly approves any investment decision in advance.
With regard to collateral, ESMA says that when a UCITS reinvests cash collateral in short-term money market funds subject to paragraph 43 (j) of the guidelines, the funds must comply with the requirements of Article 50(e)(iv) of the UCITS directive, stipulating that short-term money market funds should not invest more than 10 per cent of their assets in aggregate in other money market funds.
The ESMA guidelines may be consulted by clicking here. Please also see our article on CSSF Circular 14/592, issued on August 1 last year and implementing into Luxembourg's regulatory framework earlier ESMA guidelines on ETFs and other UCITS issues for regulators and management companies, which can be consulted by clicking here.
Olivier Sciales
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