The updated guidance ("Guidance") essentially introduces a self-certification obligation in respect of all financial indices used by a UCITS, with a submission to the Central Bank required in limited circumstances. No certification is required where an index is used solely as a performance benchmark.
Previously, if, on a "look-through" basis, a UCITS could invest directly in the constituents of the index/indices as permitted under the UCITS Regulations (for example, the "5/10/40" rule) no pre-approval of the index/indices was required. However, if a UCITS proposed to use indices (comprised of eligible assets) where it would not be possible for it to invest directly in the underlying assets without breaching the risk diversification limits in the UCITS Regulations, or the underlying constituents of an index were ineligible assets, then these indices required the Central Bank's prior approval.
The Central Bank now requires that a UCITS assess each financial index that it intends to use to ensure that it complies with all relevant regulatory requirements. Once this determination has been made a responsible person (that is a director of the UCITS Management Company/SMIC) must certify to the Central Bank that the relevant regulatory requirements are met when the UCITS seeks authorisation (or approval of an additional sub-fund) from the Central Bank. Where a previously authorised UCITS /approved sub-fund proposes to use a financial index, the certification should be provided by way of a post-authorisation submission. The form of the certification is prescribed in the Guidance.
An index submission must still be made to the Central Bank for its approval where, as permitted by the UCITS Regulations, it is proposed to request the Central Bank's approval to use a financial index, where one constituent issuer has a weighting in excess of the 20% limit (up to a maximum of up to 35%). This submission must be made at the time of the application for authorisation, (or approval of an additional sub-fund or by way of post authorisation submission for previously authorised UCITS/ approved sub-funds). Evidence as to why this is justified by exceptional market conditions must be provided.
The Guidance also provides that the Central Bank may periodically conduct quality assessments on randomly selected financial indices to ensure that they comply with relevant regulatory requirements and the Guidance. As part of these assessments the Central Bank will request a written submission together with supporting documentation to evidence that the relevant financial index meets the requirements.
Therefore, where a UCITS intends to use a financial index, and to ensure that the required certification of the index can be provided to the Central Bank, UCITS Management Companies/SMICs should:
- put procedures in place to ensure that the required certification of the index can be provided to the Central Bank;
- carry out an assessment of the proposed financial index to determine whether it meets the relevant regulatory criteria, and
- retain sufficient supporting documentation evidencing how an index complies with regulatory requirements and the Guidance.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.