The Committee of European Securities Regulators published a consultation paper March 18 on its draft advice to the European Commission regarding clarification of eligible assets for UCITS funds. The consultation is ongoing, with a decision from CESR penciled in for January next year.
The original UCITS Directive, 85/611/EEC, often referred to as the UCITS I Directive, was amended by two directives published Feb. 13, 2002. UCITS III focused essentially on the investment fund, extending the range of financial assets in which UCITS may invest.
As a result, UCITS are now permitted to invest not only in listed shares and bonds as before, but also in bank deposits, money market instruments, units of other collective investment undertakings and financial derivatives. Derivatives, under the directive, include standardized option and futures contracts dealt on regulated exchanges and over-the-counter derivatives. The new rules also recognize investment management techniques widely employed such as tracking an index.
The European Commission has identified the need to clarify certain definitions of eligible assets of the UCITS Directive as a short term priority for the implementation of the amendments made by UCITS III. The intention is to seek an even implementation and interpretation of E.U. legislation in the context of building up an internal market in financial services.
The consultation covers a number of topics:
* The factors to be used in determining whether financial instruments whose underlying investment involves products of varying degrees of liquidity and/or which may not be directly eligible for investment by a UCITS, meet the formal and qualitative requirements for recognition as a 'transferable security' within the meaning of the UCITS directive. In CESR's view UCITS should consider the following matters when deciding whether an investment they are considering purchasing amounts to a transferable security:
1) liquidity - will the security be sufficiently liquid?
2) valuation - are there accurate, reliable and generally independent valuation systems available in relation to the instrument?
3) information - what information does the issuer make available to the market (reports, etc)?
4) transferability - is the security issued on a limited basis or are there constraints on who may buy it?
5) is the acquisition of the instrument consistent with the objective of the UCITS?
6) how would the acquisition affect the overall risk profile of the UCITS?
* Whether, and under which conditions, shares of closed-end funds or different variants of closed-end funds fall under the definition of transferable securities as provided for by the UCITS Directive (for example this would cover investment trusts which, in the U.K., are categorized as transferable securities but which in certain other jurisdictions may be classified as 'investment schemes');
* the factors to be used to determine the eligibility of certain categories of money market instruments dealt in on regulated and/ or unregulated markets;
* the factors to be used to determine whether and under which conditions investment funds other than UCITS fall within the scope of the definition of 'other collective investment undertakings'; and
* the factors to be used to determine to what extent derivative financial instruments, especially credit derivative instruments, fall within the scope of the definition of 'derivative financial instruments' in the UCITS directive.
This week's Learning Curve was written byGregor Craig, a solicitor in the investment funds and financial services group atMacfarlanesin London.