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UCITS III May Be Tightened To Restrict Derivatives

A European Union regulation that was due to open the over-the-counter derivatives market to retail investors could be less of a gold rush than lawyers had first predicted. Regulators are trying to restrict the application of UCITS III (Undertakings for Collective Investments in Transferable Securities) now that they have realized the new rules would open up the whole gamut of derivatives to retail investors, according to one lawyer.

The UCITS III directive broadens the range of products that funds can invest in to include derivatives, which means capital guaranteed funds and other structured products will qualify. The directive allows the fund manager to register the product in one jurisdiction and then sell it across the single market. At the moment UCITS funds can only use derivatives for hedging.

Lawyers said the key areas of concern being addressed by EU members is the definition of a hedge fund, the use of derivatives by passively managed funds and how to value the exposure of a fund.

Individual countries must implement UCITS III at end of next year.  

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