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A Guide to UCITSin Ireland
Contents
1. Introduction
2. Legislative Basis for UCITS in Ireland
3. Overview of UCITS Permitted Asset Classes and Investment and Borrowing Restrictions
4. Transferable Securities and Money Market Instruments
5. UCITS Money Market Funds
6. Index Tracking UCITS
7. UCITS investing in other Collective Investment Schemes
8. UCITS investing in Financial Derivative Instruments
9. UCITS investing in Derivatives on Financial Indices
10. Available Legal Structures
11. UCITS Management Companies/SMICs
12. UCITS IV
13. Taxation of UCITS in Ireland
14. UCITS Authorisation Process
15. Ongoing Supervision and General Regulatory Requirements
16. Appendices
-A.Definitions:TransferableSecuritiesofMoneyMarketInstruments
-B.UCITSInvestmentandBorrowingRestrictions
-C.UCITSManagementCompanyAuthorisationOptions
17. Contact Us
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A Guide to UCITS in Ireland
Introduction
1
PAGE 3
AGUIDETOUCITS INIRELAND
1. Introduction
UndertakingsforCollectiveInvestmentin
TransferableSecurities,commonlyreferredto
asUCITS,arecollectiveinvestmentschemes
establishedandauthorisedunderaharmonised
EuropeanUnion(EU)legalframeworkunder
whichaUCITSestablishedandauthorised
inoneEUMemberStatecanbesoldcross
borderintootherEUMemberStateswithouta
requirementforanadditionalauthorisation.This
so-called“Europeanpassport”iscentraltothe
UCITSproductandenablesfundpromotersto
createasingleproductfortheentireEUrather
thanhavingtoestablishaninvestmentfund
productonajurisdictionbyjurisdictionbasis.
Originallyintroducedovertwentyyearsago,
UCITShavebecomethegoldstandardEU
investmentfundproduct,recognisednotonly
bytheEuropeanfinancialservicescommunity
butalsofurtherafieldwithmanynon-EU
jurisdictionsacceptingUCITSassuitablefor
retailsaleintotheirdomesticmarkets.Whilst
soldacrossthefullspectrumofinvestortypes,
UCITShavebeendesignedprincipallyforthe
retailmarketasopen-endeddiversified,liquid
productswiththeirparameters-permitted
assetclassesandinvestmentandborrowing
restrictions-beingenshrinedinEUlaw.
Importantly,UCITSisnotaproductwhichhas
stoodstill,ratherithasandcontinuestoevolve,
mostrecentlywithasignificantbroadening
ofpermittedassetclassesandmorerobust
governancerequirementsbeingintroducedin
2002andclarifiedin2007andwithaseries
ofadditionalchangesnowenvisagedunder
theUCITSIVproposalhavingastheiraima
furthersimplificationoftheEuropeanpassport
processforUCITS,theuseofmaster/feeder
typestructures,thecreationofaframeworkfor
cross-borderfundmergersandthereplacement
oftheSimplifiedProspectus.Underpinning
UCITSandtheproposedfutureevolutionsof
theproducthasbeenacommonEUapproach
withinvolvementfromsecuritiesregulatorsand
industryparticipantsacrosstheEuropeanUnion
ateachstageofthedevelopmentprocess.
Whilstattimesthepaceofchangemaybetoo
fastforsomeandtooslowforothers,todate
UCITShasgenerallyachievedtherightbalance.
IrelandhasbecomeoneoftheleadingEU
“exporting”jurisdictionsforUCITShavingbeen
pro-activeinimplementingtheUCITSregime
intodomesticlegislationin1989,introducing
asensibleinvestmentfundsfocusedfiscal
regimeandclearbutprudentialprocessfor
theauthorisationandsupervisionofUCITS
andrelevantserviceproviders.Theresult
hasbeenthatpromotersfromallacross
theworldhaveandcontinuetouseIreland
asadomicileofchoiceforUCITSproducts
seekingtoaccesstheEuropeanmarket
placeand,inmanycases,furtherafield.
2
LegislativeBasisforUCITSinIreland
PAGE 5
2.LegislativeBasisfor UCITS in Ireland
ThelegislativebasisforUCITSinIrelandis
foundedonEuropeanlawimplemented
domestically,expandeduponbyUCITSrelated
noticesissuedbytheIrishFinancialRegulator
(the“UCITSNotices”)andwithfurther
clarificationprovidedforinaseriesofFinancial
Regulatorguidancenotes(“GuidanceNotes”)
eachofwhich–Europeananddomestic
legislationandtheUCITSNoticesand
GuidanceNotes–haveevolvedandbeen
amendedovertime.
(i) European Legislation
TheoriginalUCITSDirective(Directive
85/611/EC)of1985establishedthe
UCITSproductasapan-European
collectiveinvestmentschemewhich
benefitedfromanEU-widepassportbased
ontheconceptofmutualrecognitionof
HomeStateauthorisation,settingdownthe
legalformswhichUCITScouldtake,their
permittedinvestmentandborrowingrules,
liquidityrequirements,prospectusdisclosure
rulesandrulesrelatingtoannualand
semi-annualreportingaswellasrules
relatingtotheroleanddutiesofUCITS
custodians/depositariesandtheir
managementcompanies.
Whilstamendedin1988(Directive
88/220/EEC)inalimitedfashiontoincrease
maximumpermittedinvestmentsincertain
typesofbondsissuedbycreditinstitutions,
in1995(post-BCCIDirective95/26/EC)and
in2000(Directive2000/64/EC)withregard
toexchangeofinformationwiththird
countries,nosubstantivechangetothe
UCITSproductwasmadeuntil2002with
theintroductionoftheUCITSManagement
CompanyDirective(Directive2001/107/EC)
andtheUCITSProductDirective(Directive
2001/108/EC),theManagementCompany
andProductDirectivesreferredtogenerally
as“UCITSIII”.
UCITSIIIrepresentedamajoroverhaulof
UCITSintermsofwhattheycouldinvestin,
howtheycouldbeofferedandsoldandhow
theyweretobemanaged.
GiventheexperienceoftheoriginalUCITS
regimeandanofteninconsistent,as
betweenEUMemberStates,applicationof
itsterms,theintroductionofUCITSIIIwas
followedbythecreationofCESR,the
CommitteeofEuropeanSecurities
Regulators,whichwasrequestedtoadvise
ontheinterpretationoftermsusedwithin
UCITSIIIwiththeaimofachievinga
commonagreedpositiononitsinterpretation
andapplication.Followingaseriesof
consultations,CESRissueditsfinaladvices
inJanuary,2006,followedinMarch,2007
byaEuropeanCommissionimplementing
Directive(Directive2007/16/EC),referredto
astheEligibleAssetsDirective,whichwas
inturnaccompaniedbyCESRguidelines
concerningUCITSeligibleassets.
(ii) Irish Legislation
Theoriginal1985UCITSDirective(as
amended)wasimplementedintodomestic
IrishlawbytheEuropeanCommunities
(UndertakingsforCollectiveInvestmentin
TransferableSecurities)Regulations,1989
(the“1989UCITSRegulations”).
PAGE6
The1989UCITSRegulationswereamended
in1996(S.I.No.357/1996),in1999(S.I.
No.50/1999)andin2003(S.I.No.51/2003)
andwerethenrevokedandreplaced,inthe
contextofdomesticimplementationofUCITS
III,bytheEuropeanCommunities
(UndertakingsforCollectiveInvestmentin
TransferableSecurities)Regulations(S.I.No.
212/2003)(asamendedbyS.I.No.213of
2003)(the“2003UCITSRegulations”).
SubsequentlyamendedbyS.I.No.497/2003,
bytheCentralBankandFinancialServices
AuthorityAct,2004(introductionofasingle
regulatorforfinancialservicesinIreland),by
theInvestmentFunds,Companiesand
MiscellaneousProvisionsAct,2005
(introductionofsegregatedliabilityfor
umbrellainvestmentcompanies)andby
S.I.No.832/2007(implementationofEligible
AssetsDirective),thepresentlegislative
basisforUCITSinIrelandisencompassedin
the2003UCITSRegulations(asamended).
(iii) UCITS Notices
TheIrishFinancialRegulatorhasissueda
specificsetofUCITSNoticeswhichexplain
andclarifyvariousaspectsoftheUCITS
Regulatorsandwhichsetdownconditions
notcontainedwithintheUCITSRegulations
withwhichIrishUCITSarerequiredto
conform.
TheseUCITSNoticesdealwith:
Informationanddocumentrequirements
oftheFinancialRegulatorinsupportof
anapplicationforauthorisationasa
UCITS–UCITS1.
SupervisoryrequirementsforUCITS
authorisedbytheFinancialRegulator
andcertainfirmsprovidingservicesto
suchUCITS–UCITS2.
Trustees–eligibilitycriteria–UCITS3.
Trustees–dutiesandconditions–UCITS4.
Generalconditions–UCITS5.
Prospectus–UCITS6.
Informationtobeincludedinthemonthly
returns–UCITS7.
Publicationofannualandhalf-yearly
reports–UCITS8.
EligibleAssetsandInvestment
restrictions–UCITS9.
Financialderivativeinstruments–UCITS10.
Borrowingpowers–UCITS11.
TechniquesandInstrumentsincluding
Repurchase/ReverseRepurchaseand
Stocklendingforthepurposesofefficient
portfoliomanagement–UCITS12.
UmbrellaUCITS–UCITS13.
Dealingsbypromoter,manager,trustee,
investmentadviserandgroupcompanies
–UCITS14.
SupervisoryrequirementsforUCITS
authorisedinanotherMemberState
intendingtomarkettheirunitsinIreland
–UCITS15.
PAGE7
Codeofconductinrelationtocollective
portfoliomanagement–UCITS16.
CapitalComplianceRequirement–
Guidanceandregulatoryreport.
WerefertocertainoftheseNoticesin
particularthroughoutthisdocument.
(iv) Financial Regulator Guidance Notes and Policy Documents
TheFinancialRegulatorhasadditionally
issuedaseriesofGuidanceNoteswhich
providefurtherclarificationontheFinancial
Regulator’sapproachonparticularissues
andhasalsoissuedanumberofspecific
policydocuments.
CertainGuidanceNoteshaveapplication
toallregulatedfundtypes(bothUCITS
andNon-UCITS)suchasthosedealing
withfundpromoters,permittedmarketsfor
retailschemes,multi-adviserschemes,
MoneyMarketFunds,valuationrules,etc.,
withothershavingspecificUCITS
applicationsuchasthosedealingwith
UCITSinvestinginothercollective
investmentschemes,withUCITSinvesting
inFinancialDerivativeInstruments,with
theSimplifiedProspectus,withUCITS
investinginFinancialIndicesandwith
UCITSprospectusdisclosuresfor
StructuredProductsandComplex
TradingStrategies.
OverviewofUCITSPermittedAssetClassesandInvestmentand
BorrowingRestrictions
3
PAGE9
3.OverviewofUCITSPermitted AssetClassesandInvestment andBorrowingRestrictions
(i) Permitted Asset Classes
Whilstdealtwithingreaterdetailinfollowing
sections,UCITSareinsummarypermitted
toinvestin:
transferablesecuritiesandmoney
marketinstrumentswhichareeither
admittedtoofficiallistingonastock
exchangeinanEUMemberStateor
non-EUMemberStateorwhichare
dealtonamarketwhichisregulated,
operatingregularlyrecognisedand
opentothepublic;
recentlyissuedtransferablesecurities
whichwillbeadmittedtoofficiallisting
onastockexchangeorothermarket
(asdescribedabove)withinayear;
moneymarketinstruments,otherthan thosedealtinonaregulatedmarket
providedthattheissueortheissueris
itselfregulatedforthepurposeof
protectinginvestorsandsavings;
unitsofUCITSandunitsofnon-UCITS
collectiveinvestmentschemes(CIS)
(incertaincases);
depositswithcreditinstitutions;and
financialderivativeinstrumentsthat meetcertaincriteria;and
transferablesecuritiesandmoney
marketinstrumentsotherthanthose
referredtoabove(subjecttoamaximum
aggregatelimitofnetassetvalue).
Giventheincreasedinvestment
opportunitiesgrantedunderUCITSIII
andthesubsequentclarificationoftheterms
“transferablesecurities”and“moneymarket
instruments”,UCITSprovideforavery
broadspectrumoffundtypesand
exposures,fromrelativelyplainvanilla
equityandbondproductsthroughtoUCITS
takingexposurestohedgefundand
commoditiesindices,withUCITSfundof
funds,moneymarketandcashfundsand
indexreplicatorsalsoprovidedfor.
(ii) Investment and Borrowing Restrictions
YouwillfindthestandardUCITSinvestment
andborrowingrestrictionssetoutin
AppendixB.Inthefollowingsectionsfurther
detailisgivenontheapplicationofthose
investmentandborrowingrestrictions,
takingaccountofhowtheFinancial
Regulatorhasinterpretedand/orapplies
thoserestrictions,inthecontextofparticular
typesofUCITSproducts.
Insummary,however,itisimportanttonote:
thattheprincipalUCITSfocusison
portfoliodiversificationandliquidity;
thegeneral“5/10/40”rulerequiringthat
nomorethan10%ofaUCITSnet
assetsmaybeinvestedintransferable
securitiesormoneymarketinstruments
issuedbythesamebody,withafurther
PAGE 10
aggregatelimitationof40%ofnetassets
onexposuresofgreaterthan5%tosingle
issuers;
thatthereareexceptionstotheabove forinvestmentsissuedorguaranteedby
governments,localauthoritiesorcertain
publicinternationalorsupra-national
bodies;
thatindexreplicatorscantake
exposuresupto20%ofnetassetsto
singleissuers,withupto35%toasingle
issuerinexceptionalmarketconditions;
thatupto100%ofnetassetscanbe
investedinothercollectiveinvestment
schemes(CIS),providednomorethan
20%investedinanyoneCIS,withan
aggregaterestrictionof30%ofnet
assetsapplyingtoinvestmentinnon-
UCITSCISaswellasstrictrules
applyingtothenatureofCISinwhicha
UCITScaninvest,aswellaslimiting
investmenttoamaximumof25%ofthe
unitsoftheunderlyingCIS;
thatnomorethan20%ofnetassetscan
beinvestedincashdepositswithany
onecreditinstitutionaspermittedbythe
FinancialRegulatorandupto10%of
netassetsmaybeheldforancillary
liquiditypurposeswithothercredit
institutions(which10%limitisraisedto
20%inthecaseofdepositsmadewith
thecustodian/trustee);
thatinvestmentsin/throughderivatives
maybemade/takentoassetsinto
whichaUCITScaninvestdirectly
includingfinancialinstrumentshaving
oneorseveralcharacteristicsofthose
assets,andtofinancialindices,interest
rates,FXratesandcurrencies;
thatthemaximumexposuretoasingle OTCderivativecounterpartyis5%,
increasingto10%forcertaincredit
institutions;
thatvariousaggregationsoftheabove restrictionsapply(seeAppendixBfor
furtherdetail);
thatthemaximumaggregateexposure tosecurities/instruments(otherthan
CIS,derivativesandcash)notlistedor
tradedonarecognisedmarketis10%of
netassets;
thatadditionalgeneralprovisionsapply includingconcentrationlimits,
prohibitionsontakinglegal/management
controlofissuers,prohibitionson
uncoveredsales;and
thatborrowingsarelimitedto10%ofnet
assetsandcanonlybeusedfor
temporarypurposes(forliquidity).
(iii) Efficient Portfolio Management Techniques and Instruments
UCITSarepermittedtousetechniques
andinstrumentsrelatingtotransferable
securitiesandmoneymarketinstruments
forefficientportfoliomanagement(EPM)
purposeswhichistakentomeanthatthey
areeconomicallyappropriateandare
enteredintowiththeaimofreducingrisk,
PAGE 11
reducingcostorgeneratingadditional
capitalorincome(withalevelofrisk
consistentwiththeUCITSriskprofile).
DerivativesusedforEPMpurposesmust
complywithnormalrulesforinvestmentin
financialderivativeinstruments.
Repos/ReverseReposandstocklending
areexpresslypermittedwithstrictrules
regardingcollateralincludingacceptable
formsofcollateral,levelprovided,valuation
ofcollateralandhowandwhereheldand
maintained.Therearealsostrictrulesas
tocounterpartycreditrating(A2or
equivalentordeemedimpliedrating
ofA2)orindemnification.
TransferableSecurities andMoneyMarket
Instruments
4
PAGE 13
4.TransferableSecuritiesand MoneyMarketInstruments
AstheUCITSacronymsuggests,itsoriginal
focuswasoninvestmentin“transferable
securities”althoughasyouwillnotefromthe
followingsectionsUCITSdoofferfarwider
investmentpossibilities.Additionallyaprimary
UCITSfocushasbeenon“moneymarket
instruments”.Althoughthefulldefinitionsof
bothtermsaresetoutinAppendixA,wehave
highlightedthekeyelementsofbothbelow,
particularlygiventheclarificationsprovidedin
2007bytheEligibleAssetsDirective.
A. Transferable Securities
(i) UCITS III Definitions
Whilstnotdefinedintheoriginal1985
UCITSDirective,theUCITSIIIProduct
Directivedidintroduceadefinitionofthe
term“transferablesecurities”asbeing:
sharesincompaniesandother
securitiesequivalenttosharesin
companies(“shares”);
bondsandotherformsofsecuritised
debt(“debtsecurities”);
othernegotiablesecuritieswhichcarry
therighttoacquireanysuch
transferablesecuritiesbysubscription
orexchange;
otherthanthepermittedUCITSefficient
portfoliomanagement(EPM)techniques
andinstruments.
(ii) Clarification by Eligible Asset Directive
In2007theEligibleAssetsDirective
clarifiedtheabovedefinitionbyproviding
thatthereferencetotransferablesecurities
“shallbeunderstoodasareferenceto
financialinstrumentswhichfulfilthe
followingcriteria”:
(a) thepotentiallosswhichtheUCITS
mayincurwithrespecttoholdingthose
instrumentsislimitedtotheamountpaid
forthem;
(b) theirliquiditydoesnotcompromise
theabilityoftheUCITStocomplywith
itsobligationtoprovideatleast
fortnightlyredemptionfacilities;
(c) reliablevaluationisavailableforthem
asfollows:
(ii) inthecaseofsecuritiesadmittedto
ordealtinonaregulatedmarketin
theformofaccurate,reliableand
regularpriceswhichareeither
marketpricesorpricesmade
availablebyvaluationsystems
independentfromissuers;
(iii) inthecaseofothersecurities[i.e.
theaggregate10%thatcanbe
investedintransferablesecurities
andmoneymarketinstruments
notspecificallyreferredtoinArticle
19(1)],intheformofavaluationon
aperiodicbasiswhichisderived
PAGE14
frominformationfromtheissuer
ofthesecurityorfromcompetent
investmentresearch;
(d) appropriateinformationisavailablefor
themasfollows:
(i) inthecaseofsecuritiesadmitted
toordealtinonaregulatedmarket
asreferredtoinsubparagraphs(a)
to(d)ofArticle19(1),intheformof
regular,accurateandcomprehensive
informationtothemarketonthe
securityor,whererelevant,onthe
portfolioofthesecurity;
(ii) inthecaseofothersecuritiesas
referredtoinArticle19(2),inthe
formofregularandaccurate
informationtotheUCITSonthe
securityor,whererelevant,on
theportfolioofthesecurity;
(e) theyarenegotiable;
(f) theiracquisitionisconsistentwiththe
investmentobjectivesortheinvestment
policy,orboth,oftheUCITS;
(g) theirrisksareadequatelycaptured
bytheriskmanagementprocess
oftheUCITS.
Itisworthnotingthatliquidityisacentral
requirementforUCITSportfoliosand,
accordingly,therearebroadprincipleslaid
downregardingpresumptionsastoliquidity,
assessmentofliquidityriskwhere
informationisavailablewhichsuggests
redemptionfacilitiescouldbecompromised
byatransferablesecurityaswellas
principlesregardingconsiderationofor
presumptionofnegotiability.
(iii) Closed Ended Funds
TheEligibleAssetsDirectivehasmadeit
clearthatcertainclosed-endedfundswillfall
withinthe“transferablesecurities”definition
andthereforebeeligibleforinvestmentby
UCITSwhere:
(i) theyfulfilthecriteriasetoutin“(ii)
ClarificationbyEligibleAssetsDirective”
above;
(ii) theyaresubjecttocorporate
governancemechanismsappliedto
companiesorequivalenttothoseapplied
tocompanies;
(iii) theyaremanagedbyanentitywhichis
(orwhereassetmanagementactivityis
carriedoutbyanotherentityonbehalfof
theclosedendedfund,thatentityis)
subjecttonationalregulationforthe
purposeofinvestorprotection.
AppendixAsetsoutsomeoftheprinciples
usedinconsideringtheequivalence
ofcorporategovernancemechanismsfor
contractualtypeclosed-endedfunds.
AUCITSmaynotmakeinvestmentin
closedendedfundsforthepurposes
ofcircumventingthenormalUCITS
investmentlimits.
(iv) Structured Financial Instruments
Structuredfinancialinstrumentscanalso
beeligibleforinvestmentas“transferable
PAGE 15
securities”wheretheyarefinancial
instrumentswhich:
(i) fulfilthecriteriasetout“(ii)Clarification
byEligibleAssetsDirective”above;
(ii) arebackedby,orlinkedtothe
performanceof,otherassets,which
maydifferfromthosereferredtoin
Article19(1);providedthatwherea
financialinstrumentcoveredbythis
subparagraphcontainsanembedded
derivativecomponent,therequirements
regardingthederivativesrisk
managementprocess,globalexposure
andaggregationofdirectandindirect
exposuresshallapplytothat
component.
B. Money Market Instruments
Theterm“moneymarketinstruments”refers
toinstrumentsnormallydealtinonthe
moneymarketwhichareliquid,andhavea
valuewhichcanbeaccuratelydetermined
atanytime.UCITScaninvestinmoney
marketinstrumentsadmittedtotrading/dealt
inonaregulatedmarketandinmoney
marketinstrumentswhicharenotadmitted
toordealtinonaregulatedmarket.
(i) Instruments normally dealt in on the Money Market
Thereferencetomoneymarketinstruments
as“instrumentsnormallydealtinonthe
moneymarket”shallbeunderstoodasa
referencetofinancialinstrumentswhichfulfil
oneofthefollowingcriteria:
(i) theyhaveamaturityofissuanceofupto
andincluding397days;
(ii) theyhavearesidentialmaturityofupto
andincluding397days;
(iii) theyundergoregularyieldadjustments
inlinewithmoneymarketconditionsat
leastevery397days;
(iv)theirriskprofile,includingcreditand
interestraterisks,correspondstothatof
financialinstrumentswhichhavea
maturityasreferredtoinsubparagraphs
(i)or(ii),oraresubjecttoayield
adjustmentasreferredtoin
subparagraph(iii).
(ii) Instruments which are liquid
Thereferencetomoneymarketinstruments
as“instrumentswhichareliquid”shallbe
understoodasareferencetofinancial
instrumentswhichcanbesoldatlimited
costinanadequatelyshorttimeframe,
takingintoaccounttheobligationofthe
UCITStorepurchaseorredeemitsunitsat
therequestofanyunitholder.
AppendixAsetsdownthefactorstobe
takenintoaccountatboththeinstrument
andfundlevelinassessingliquidity.
(iii) Instruments which have a value which can be accurately determined at any time
Thereferenceto“moneymarketinstruments
asinstrumentswhichhaveavaluewhich
canbeaccuratelydeterminedatanytime”
PAGE16
shallbeunderstoodasareferenceto
financialinstrumentsforwhichaccurateand
reliablevaluationssystems,whichfulfilthe
followingcriteria,areavailable:
(a) theyenabletheUCITStocalculatea
netassetvalueinaccordancewiththe
valueatwhichthefinancialinstrument
heldintheportfoliocouldbeexchanged
betweenknowledgeablewillingparties
inanarm’slengthtransaction;
(b) theyarebasedeitheronmarketdataor
onvaluationmodelsincludingsystems
basedonamortisedcosts.
Withrespecttothecriterion“valuewhich
canbeaccuratelydeterminedatanytime”,
iftheUCITSconsidersthatanamortisation
methodcanbeusedtoassessthevalueof
amoneymarketinstrument,itmustensure
thatthiswillnotresultinadiscrepancy
betweenthevalueofthemoneymarket
instrumentandthevaluecalculated
accordingtotheamortisationmethodas
setoutinGuidanceNote-/08UCITS:
Valuationofassetsofmoneymarketfunds.
Moredetailonliquidityrequirements
andongovernmentalissuesandissues
bysecuritisationvehiclescanbefound
inAppendixA.
PAGE17
UCITSMoneyMarketFunds
5
PAGE19
5. UCITSMoneyMarketFunds
WhilstmanyUCITSwillinvestprincipallyin
moneymarketinstrumentsandmayconsider
themselvestobemoneymarketfunds,there
areonlycertainfundswhicharepermitted
bytheFinancialRegulatortoreferto“money
marketfunds”initstitleandtofollowan
amortisedcostvaluationmethodology.Such
moneymarketfundsmustbeestablishedas
constantNAVFundsoraccumulatingNAVfunds
withtheprincipalobjectivetopreserveprincipal
andmaintainliquidity.Further,onlythosemoney
marketfundswhichhaveobtainedatripleA
ratingfromaninternationallyrecognisedrating
agencytogetherwithasupplementarymarket
riskrating(forexampleAAmbyStandard&
PoorsorAaa/MR1+byMoodys)orwhichhave
managementcompanies/investmentmanagers
withdemonstrableexpertiseintheoperationof
moneymarketfunds(whichuseamortisedcost
valuation)canusethetermmoneymarketfund
orUCITSmoneymarketfundintheirtitleand
followanamortisedcostvaluationmethodology.
Othertypesofmoneymarketfundsmaynot
usethetermmoneymarketfundintheirtitle
andmustvalueassetsonamarktomarket
basisinaccordancewiththevaluationrules
setoutbytheFinancialRegulatorinits
GuidanceNote1/00.
Inthissectionwedealonlywiththeformertype
ofmoneymarketfund.
(i) Key Conditions
Anumberofconditionsapplytomoney
marketfundswhichusetheamortisedcost
valuationmethodologyasfollows:
Eligible Assets:assetsmustberestricted
tocashorhigh-qualitymoneymarket
instruments;
Maturity:assetsarerestrictedtosecurities
whichcomplywithoneofthefollowing
criteria:
(a) haveamaturityatissuanceofuptoand
including397days;
(b) havearesidualmaturityofuptoand
including397days;and
(c) undergoregularyieldadjustmentsin
linewithmoneymarketconditionsat
leastevery397days;and/or
(d) theriskprofile,includingcreditand
interestraterisk,correspondtothatof
financialinstrumentswhichhavesuch
maturitiesoryieldadjustments.
Inthecaseof(c)and(d)above,themoney
marketinstrumentsinvestedinmustalso
meetwiththefinalmaturityrequirementsof
therelevantratingagency.
WAM:theweightedaveragematurityofthe
portfoliomustnotexceed60days;
Mark to Market:aweeklyreviewof
discrepanciesbetweenmarketvalue
andamortisedcostvalueofmoneymarket
instrumentsmustbecarriedoutwith
escalationproceduresbeingputinplace
toensurethatmaterialdiscrepancies
arebroughttotheattentionofinvestment
managementpersonnelwithdiscrepancies
inexcessof0.1%beingbrought
PAGE 20
totheattentionofseniormanagement
withinthemanagementcompanyor
boardofdirectors,theinvestmentmanager
andtrustee/custodianandifdiscrepancies
inexcessof0.3%occurthenadaily
reviewmusttakeplacewiththe
managementcompany/directorsnotifying
theFinancialRegulatorofthediscrepancies
andindicatingwhataction,ifany,willbe
takentoreducethedilution.
Stress Testing:amonthlyportfolioanalysis
isrequiredtobecarriedoutincorporating
stresstestingtoexamineportfolioreturns
undervariousmarketscenariosto
determineifportfolioconstituentsare
appropriatetomeetpredeterminedlevels
ofcreditrisk,interestraterisk,marketrisk
andinvestorredemptionsandthisperiodic
analysismustbeavailableforinspectionby
theFinancialRegulator.
(ii) ECB Reporting Requirements
Moneymarketfundsarerequiredto
provideavarietyofmonthlyandquarterly
datathroughtheFinancialRegulatorfor
thepurposeofEuropeanCentralBank
reportingrequirements.GuidanceNote
GN2/99setsouttherelevantrequirements
intowhichmoneymarketfundsthe
obligationsapply.
PAGE 21
IndexTrackingUCITS
6
PAGE 23
6. IndexTrackingUCITS
OneofthecornerstonesofUCITSsincethe
introductionoftheoriginalUCITSDirective
in1985hasbeentheimpositionofstrict
riskspreadingrequirements.Thishasbeen
enshrinedinwhatiscommonlyknownas
the5/10/40rulewhichisthataUCITSmay
investnomorethan10%ofitsnetassets
intransferablesecuritiesormoneymarket
instrumentsissuedbythesamebody,provided
thatthetotalvalueoftransferablesecurities
ormoneymarketinstrumentsheldinissuing
bodiesineachofwhichitcaninvestmore
than5%islessthan40%.
ThisfundamentalUCITSprincipledidcreate
problemsforUCITSwhichwishedtotrackan
indexwheretheweightingofaconstituent
elementoftheindexexceededthe5%limitor
wheretherelationshipbetweentwoormore
constituentelementsoftheindexmeantthat
theywereconsideredtoconstituteasingle
issuerresultinginanaggregationofthe
exposure.
(i) 20% and 35% Rule
SincetheintroductionofaUCITSIII,UCITS
whosepolicyistoreplicateanindexisnow
permittedtoinvestupto20%ofnetassets
insharesand/ordebtsecuritiesissuedby
thesamebody,withthe20%limitbeing
raisedupto35%inthecaseofasingle
issuerwherejustifiedbyexceptional
marketconditions.Thisflexibilityis
permittedwheretherelevantindexis
recognisedbytheFinancialRegulator
onthebasisthatitissufficientlydiversified,
itrepresentsanadequatebenchmarkfor
themarkettowhichitrefersanditis
publishedinanappropriatemanner.
(ii) Index Replication
Thereferenceto“replication”ofthe
compositionofasharesordebtsecurities
indexisconsideredbytheFinancial
Regulatortomeanreplicationofthe
compositionoftheunderlyingassetsof
theindexincludingtheuseofderivatives
orotherpermittedUCITSefficientportfolio
managementtechniquesandinstruments.
(iii) Sufficient Diversification
Althoughsomewhatcircular,referenceto
anindex’scompositionbeingdiversified
referstoanindexwhichallowsfora
maximumweightingperissuerof20%with
acapacityforasingleconstituenttoexceed
20%butnotexceed35%oftheindex.
(iv) Adequate Benchmark
Thereferencetotheindexrepresenting
anadequatebenchmarkforthemarketto
whichitrefersisareferencetoanindex
whoseproviderusesarecognised
methodologywhichgenerallydoesnot
resultintheexclusionofamajorissuer
ofthemarkettowhichitrefers.
(v) Publication
Therequirementthattheindexbepublished
inanappropriatemanneristakenasa
referencetoanindexwhichisaccessible
tothepublicandwheretheindexprovideris
independentfromtheindexreplicating
UCITS.Note,however,thatthissecond
requirementdoesnotprecludeindex
providersandtheUCITSformingpartof
thesameeconomicgroupprovidedthat
effectivearrangementsforthemanagement
ofconflictsofinterestareinplace.
UCITSInvestinginOtherCollectiveInvestment
Schemes
7
PAGE 25
7. UCITSInvestinginOther CollectiveInvestment Schemes
UCITSarepermittedtoinvestupto100%
oftheirassetsinotheropen-endedcollective
investmentschemes(“CIS”)wherethose
CISare:
otherUCITS;or
otherEUornon-EUCISthesoleobject
ofwhichisthecollectiveinvestmentin
transferableseriesand/orinotherliquid
financialassetsofcapitalraisedfromthe
publicandwhichoperateontheprinciple
ofriskspreadingandtheunitsofwhich
areattherequestofholders,repurchased
orredeemed,directlyorindirectlyoutof
thoseundertakingsassetsprovidedthat:
(a) suchotherCISareauthorisedunder
lawswhichprovidethattheyaresubject
tosupervisionconsideredbythe
FinancialRegulatortobeequivalent
tothatlaiddownincommunitylawand
thatco-operationbetweenauthorities
issufficientlyinsured;
(b) thelevelofprotectionforunitholders
intheotherCISisequivalenttothat
providedforinvestorsinaUCITSand
inparticularthattherulesonassets
segregation,borrowing,lendingand
uncoveredsalesoftransferable
securitiesandmoneymarket
instrumentsareequivalenttothe
requirementsoftheUCITS;
(c) thebusinessoftheotherCISisreported
inhalf-yearlyandannualreportsto
enableanassessmenttobemadeof
theassetsandliabilities,incomeand
operationsoverthereportingperiod;
and
(d) nomorethan10%oftheUCITSor
otherCISassets,whoseacquisition
iscontemplated,canbe,accordingto
itsrulesorinstrumentsofincorporation
investedinaggregateinunitsofother
UCITSorotheropen-endedCIS.
(i) Investment Restrictions
Inadditiontotherestrictionsonthetypes
ofnon-UCITSCISthataUCITSmayinvest
in,therearefourmaininvestment
restrictionswhichapplytoUCITSinvesting
inotherCISwhicharethat:
themaximumexposuretoanyoneCIS
maynotexceed20%ofthenetasset
valueofaUCITS(eachsub-fundofan
underlyingumbrellaCISbeingregarded
asaseparateCISforthepurposeof
applyingthislimit);
themaximumaggregateinvestmentin
non-UCITSCISmaynotexceed30%
ofthenetassetvalueoftheUCITS;
investmentinaCISwhichcanitself
investmorethan10%ofnetassetsin
otherCISisnotpermitted;and
investmentinaCISmustnotresultin
theacquisitionofmorethan25%ofthe
PAGE26
unitsofanysingleCIS(orsub-fundofan
umbrellaCIS).
(ii) Acceptable Types of Non-UCITS CIS
InGuidanceNote2/03,theFinancial
Regulatorhasindicateditwillpermit
investmentbyUCITSinthefollowing
categoriesofnon-UCITSCIS:
schemesestablishedinGuernseyand
authorisedasClassAschemes;
schemesestablishedinJerseyas
RecognisedFunds;
schemesestablishedintheIsleofMan
asAuthorisedSchemes;
Non-UCITSRetailCISauthorisedbythe
FinancialRegulatoritselfprovidedsuch
CIScomplyinallmaterialrespectswith
theprovisionsoftheUCITSNotices;
non-UCITSCISauthorisedinthe
MemberStateoftheEEA,theUnited
States,GuernseyortheIsleofMan
andwhichcomply,inallmaterial
respectswiththeprovisionsofthe
UCITSNotices.
(iii) Financial Regulator’s consideration of “in all material respects”
Inthisregard,theFinancialRegulator’s
considerationof“allmaterialrespects”,
includes,interalia,considerationof:
theexistenceofanindependenttrustee/
custodianwithsimilar(toIrishtrustee/
custodians)dutiesandresponsibilities
inrelationtobothsafekeepingand
supervision;
requirementsforthespreadingof
investmentrisk,includingconcentration
limits,ownershiprestrictions,leverage
andborrowingrestrictions,etc.;
availabilityofpricinginformationand
reportingrequirements;
redemptionfacilitiesandfrequency;
restrictionsinrelationtodealingsby
relatedparties.
(iv) Other Jurisdictions Tests
Asyouwillnotefromtheabove,the
FinancialRegulatorhasindicatedanumber
ofjurisdictionsandtypesofCISwhichit
considerstobeacceptableforinvestment
byaUCITS.Otherjurisdictionsandtypes
ofCISmaybeconsideredbytheFinancial
Regulatoronsubmissiontoitandin
assessinganysuchsubmissions,the
FinancialRegulatorhasindicatedinits
GuidanceNotethatitwillhaveregardto
memorandaofunderstanding(bi-lateralor
multi-lateral),membershipofan
internationalorganisationofregulatorsor
otherco-operativearrangements,(suchas
exchangeofletters)toensuresatisfactory
co-operationbetweentheFinancial
Regulatorandthecompetentauthority
oftherelevantCIS:
themanagementcompanyofthetarget
CIS,itsrulesanditschoiceoftrustee
PAGE27
havebeenapprovedbyitsown
regulator;
theCISisauthorisedinanOECD
jurisdiction.
(v) Financial Regulator’s consideration of “equivalence”for Non-UCITS CIS
Asindicatedabove,inorderforanon-
UCITStobeanacceptableinvestment
ofaUCITS,theFinancialRegulatorneeds
tobesatisfiedthatitisbothauthorised
underalegislativeregimewhichprovides
thatitissubjecttosupervisionconsidered
bytheFinancialRegulatortobeequivalent
tothatspecifiedincommunitylawandthat
theapplicableregulatoryregimeissuchthat
thelevelofprotectionforinvestorsis
equivalenttothatprovidedforinvestorsina
UCITS,thatrulesonsegregationofassets,
borrowing,lendinganduncoveredsalesof
transferablesecuritiesandmoneymarket
instrumentsareequivalenttothoselaid
downbytheUCITSDirective.
InitsGuidanceNote2/03,theFinancial
Regulatorhasindicatedthatitwillusethe
followingfactorstoguideitsconsideration
astowhethersuchequivalenceexists:
rulesguaranteeingtheautonomy
ofthemanagementoftheCIS,and
managementintheexclusiveinterest
oftheunitholders;
theexistenceofanindependent
trustee/custodianwithsimilarduties
andresponsibilitiesinrelationtoboth
safekeepingandsupervision.Where
anindependenttrustee/custodianis
notarequirementoflocallaw,robust
governancestructuresmayprovidea
suitablealternative;
availabilityofpricinginformationand
reportingrequirements;
redemptionfacilitiesandfrequency;
restrictionsinrelationtodealingsby
relatedparties;
theextentofassetsegregation;and
localrequirementsforborrowing,
lendinganduncoveredsalesof
transferablesecuritiesandmoney
marketinstrumentsregardingthe
portfoliooftheCIS.
(vi) Fees/Charges and Disclosures
WhereaUCITSintendstoinvestmore
than20%ofitsnetassetsinotherCIS,
itsprospectusmustdisclosethemaximum
levelofmanagementfeesthatmaybe
chargedtotheUCITSitselfandtothe
underlyingCIS.Inotherwords,the
aggregatemanagementfeesatboth
levelshavetobedisclosed.Inaddition,
actualaggregatemanagementfeesat
bothlevelshavetobedisclosedinthe
UCITSannualreport.
Inaddition,whereaUCITSinvestsina
linkedCIS(whereboththeUCITSand
CISaremanaged,directlyorindirectly
bydelegationbythesamemanagement
companyorwherethemanagement
PAGE28
companyofboththeUCITSandunderlying
CISarelinkedbycommonmanagement
orcontrolorbyasubstantialdirector
indirectholding),themanagerofthe
underlyingCISisnotpermittedtocharge
subscriptionorredemptionfeesbyaccount
oftheUCITSinvestmentinit.
(vii) Cross Investment with umbrella Investment Companies
Onesub-fundwithinaUCITSumbrella
investmentcompanytypeschemeisonly
permittedtoinvestinanothersub-fund
withinthesameumbrellawherethe
umbrellaschemeoritsdelegate(i.e.the
administrator)hasthesystemscapability
toprovidedisclosureinrelationtocross-
holdingsinaccordancewithindustry
adoptedstandards.
Whereasub-fundinvestsinoneor
moresub-fundsofanyumbrellaUCITS,
inadditiontotherequirementsabovein
relationtoinvestmentbyUCITSinalinked
CIS,theinvestingsub-fundmaynotcharge
anannualmanagementfee(orinvestment
managementfee)inrespectofthatportion
ofitsassetsinvestedinothersub-funds.
Additionally,investmentmaynotbemadein
asub-fundwhichitselfholdsunitsinother
sub-fundswithinthesameumbrellaUCITS.
PAGE29
UCITSinvestinginFinancialDerivative
Instruments
8
PAGE 31
8.UCITSinvestinginFinancial DerivativeInstruments
UCITSmayinvestinfinancialderivative
instrumentsforinvestmentpurposessubjectto
avarietyofconditionsasoutlinedbelowrelating
tothenatureoftheexposurestaken,the
leveragegeneratedthroughsuchpositions,the
processemployedbytheUCITStomanagethe
risksarisingfromderivativesinvestmentaswell
asrulesrelatingtoOTCcounterpartyexposure
andtothevaluationofderivativespositions.
TheFinancialRegulatorhasprescribedindetail
throughitsUCITSNoticesandGuidanceNotes
theriskmanagementconditionsthatmustbe
metbyIrishUCITSinvestinginderivatives.
PriortotheintroductionofUCITSIII,UCITS
couldonlyemployderivativesforefficient
portfoliomanagement(“EPM”)purposes.
Regulation45oftheUCITSRegulations
nowprovidesthatUCITSmayinvestin
exchangetradedorover-the-counterderivative
instrumentsforinvestmentpurposes,subject
tocertainconditionsinparticularthoseset
downin:
UCITSNotice9–whichsetsoutinvestment
restrictionsapplicabletoUCITSincluding
limitsoncounterpartiesandcertain
counterpartycriteria;
UCITSNotice10–whichsetsouthigh
levelderivativesrulesincludingsummaryof
permittedderivatives,coverrequirements
andriskmanagementrequirements;and
GuidanceNote3/03–whichcontains
detailedprovisionsfortheuseofderivatives
byUCITS.
(i) Conditions for the use of derivatives by UCITS
AsoutlinedinUCITSNotice10,UCITSmay
investinanytypeofexchangetradedor
OTCderivativeforinvestmentpurposes,
subjecttothefollowingconditions:
theunderlyingassetrelatestoUCITS
eligibleassets(i.e.transferable
securities,moneymarketinstruments,
CIS,deposits),financialinstruments
havingoneorseveralcharacteristicsof
theseassets,financialindices,interest
rates,foreignexchangeratesor
currencies;
thecounterpartiestoOTCderivative
transactionsareinstitutionssubjectto
prudentialsupervisionandbelongto
categoriesapprovedbytheFinancial
Regulator(qualifyingcreditinstitutions,
MIFIDauthorisedinvestmentfirmsor
anentitysubjecttoregulationasa
ConsolidatedSupervisedEntitybythe
USSecuritiesandExchange
Commission)withaminimumcredit
rating(inthecaseofcounterparties
whicharenotcreditinstitutions)of
A2orequivalent,oranimpliedrating
ofA2orguaranteedbyanentitywith
aratingofA2;
theOTCderivativesaresubjectto
reliableandverifiablevaluationona
PAGE 32
dailybasisandcanbesold,liquidated
orclosedbyanoffsettingtransactionat
anytimeattheirfairvalueatthe
initiativeoftheUCITS.
Positionsmaycreatelongorshort
exposuretotheunderlyingassetand
mayresultinleveragetotheportfolio.
UCITSthatusederivativesforinvestment
(orforEPM)purposesmustprepareaRisk
ManagementProcessandfileitforapproval
withtheFinancialRegulator.Inaddition,
adequatedisclosureofderivative
investmentsmustbemadeintheUCITS’
prospectus.Specificprovisionsinthis
regardareoutlinedinGuidanceNote3/03.
(ii) Guidance Note 3/03
GuidanceNote3/03wasproducedby
theFinancialRegulatortooutlineclearly
theparametersfortheuseofderivatives
byUCITSandtoprovideguidanceonwhat
theFinancialRegulatorexpectsinrelation
tothemeasurementandcontrolof
derivativesassociatedriskbyUCITS.
GuidanceNote3/03containsdetailed
requirementsregardingtheformatand
contentoftheRiskManagementProcess,
theoptionsformeasuringandcontrolling
riskexposureandsetsoutrequirements
andlimitsonpositionexposure,
counterpartyexposureaswellas
counterpartyrestrictions.
(iii) Risk Management Process
Inordertomonitor,measureandmanage
theriskprofileofaUCITS,itsinvestment
managermustconstructaformalRisk
ManagementProcessthatisadaptedto
thecomplexityandsophisticationofthe
derivativesusedwithintheUCITS.
(iv) Sophisticated vs. Non-sophisticated UCITS
Therulesformeasuringglobalexposure
andleveragedifferdependingonwhether
aUCITSischaracterisedas‘sophisticated’
or‘non-sophisticated’.
TheFinancialRegulatorhasnotprovided
aformaldefinitionofwhatconstitutesa
‘sophisticated’or‘non-sophisticated’UCITS,
ratherrequiringtheUCITStoclassifyitself
aseither‘sophisticated’or‘non-
sophisticated’andprovidearationale
forsuchclassification.
FactorsthatmaycauseaUCITStobe
considered‘sophisticated’includethe
following:
wheretheuseofderivativesforms
afundamentalpartoftheUCITS’
investmentobjectiveandwouldbe
expectedtobeusedinallmarket
conditions;
wheretheperformanceofthederivative
isnonlinearinrelationtotheunderlying
assetsortheperformanceisbasedon
areasonablycomplexmathematical
formula;
PAGE 33
wheretheuseofcoverforthederivative
positionisdifferentfromtheunderlying
ofthederivative.
TheuseofOTCderivativesmightindicate
theUCITSismoresophisticatedbutthe
complexityofthetransactionshouldalso
beconsidered.
A‘non-sophisticated’UCITSwillgenerally
onlyusealimitednumberofsimple
derivativeinstrumentsfornon-complex
hedgingorinvestmentstrategies.
(v) Measurement of Global Exposure and Leverage – Non-Sophisticated UCITS
GuidanceNote3/03providesthatthe
globalexposureandleverageofanon-
sophisticatedUCITSshouldbemeasured
usingthecommitmentapproach.AUCITS’
globalexposuremaynotexceeditsnet
assetvalue.Thusaleveragelimitof100%
applies(leveragebeingglobalexposure
dividedbynetassetvalue).
Thecommitmentapproachtakesinto
accountthefollowinginseekingtoensure
thatriskismonitoredintermsofanyfuture
commitmentstowhichtheUCITSmay
beobligated:
thecurrentvalueoftheunderlying
assetsthederivativesarebasedon
(delta-adjustedinthecaseofoptions
andwarrants);
counterpartyrisk;
futuremarketmovements;and
thetimeavailabletoliquidatethe
position.
(vi) Measurement of Global Exposure and Leverage – Sophisticated UCITS
AsophisticatedUCITSisrequiredtouse
anadvancedriskmeasurement
methodologytomeasureglobalexposure.
TheFinancialRegulatorrecommendsthe
useofthe Value-at-Risk(VaR)methodand
requiresthattheVaRmodelemployed
bytheUCITSmeetscertainquantitative
andqualitativecriteriaandbecalculated
usinganacceptableproprietaryor
commerciallyavailablemodel.
AbsoluteVaRorRelativeVaRmaybe
applied. Absolute VaRistheVaRofthe
UCITScappedasapercentageofnetasset
value.Generally,theFinancialRegulator
willimposealimitonAbsoluteVaRof5%
ofnetassetvalue.
Relative VaRistheVaRoftheUCITS
dividedbytheVaRofabenchmarkora
comparable,derivatives-freeportfolio.
UnderRelativeVaR,VaRislimitedtotwice
theVaRonthebenchmarkorcomparable,
derivatives-freeportfolio.
TheVaRmodelusedmustadheretothe
followingrequirements:
theconfidencelevelshouldbe99%;
maximumholdingperiodofonemonth;
PAGE34
minimumhistoricalobservationperiod
ofoneyear(lessifjustified,forexample
onthegroundsofrecentsignificant
changesinpricevolatility);
stresstestscarriedoutatleastquarterly
(toassessthelikelyimpactofpotential
movementsininterestrates,currencies
andcreditquality);
backtestingoftheVaRmodel(aformal
statisticalprocesstocompareactual
portfolioreturnstotheVaRpredicted).
Detailsshouldalsobedisclosedof
thefollowing:
(i) softwareused
(ii) internalcontrolsandinternal
auditofprocedures;
(iii)additionalriskmeasurement
methodsemployed;and
(iv)profileandexpertiseofstaff
monitoringrisk.
(vii) Netting/Hedging
Hedgingpositionsmaybeoffsetand
nettingappliedbeforecalculatingglobal
exposure,counterpartyexposure,position
andcoverrequirements.
(viii) Netting
Inthecontextofglobalexposure,position
andcoverrequirements,purchasedand
soldderivativespositionsmaybenetted
subjecttothefollowingconditions:
bothpositionsmustrelatetothesame
underlyingasset/referenceitemor,
inthecaseofderivativesonfixed
incomesecurities,theymustbearahigh
degreeofnegativecorrelationinterms
ofpricemovementandbotharecash
settledwiththesamecurrencyexposure;
thepositionsshouldbeliquidand
marked-to-marketdaily;
intheeventthatoneofthepositions
isexercised,arrangementsaresuch
thattheUCITSwillhavethecover
necessarytofulfilitsactualorpotential
obligationsundertheoutstandingposition.
Inthecontextofcounterpartyexposure,
purchasedandsoldderivativespositions
maybenettedprovidedthereisa
contractualnettingagreementinplace
withthecounterparty.
(ix) Hedging
Inaddition,hedgingpositionsthatreduce
theoverallriskprofileoftheUCITSwillbe
permittedwherethetransactionexhibitsa
highnegativecorrelationwithanasset,
rateorindexofanunderlyingpositionin
theportfolio.
(x) Position Exposure
Positionexposuretotheunderlying
assetsofderivatives,whencombined
PAGE 35
withpositionsfromdirectinvestments,
maynotexceedgeneralinvestmentlimits.
Thisexposureismeasuredusingthe
commitmentapproach(afternettingof
anylongandshortpositionstothesame
issuer,ifappropriate).
Acombinationofthefollowingissued
by,ormadeorundertakenwiththesame
bodymaynotexceed20%ofaUCITS’
netassetvalue:
transferablesecuritiesor
moneymarketinstruments;
deposits;
counterpartyriskexposuresfrom
OTCderivativetransactions;and/or
positionexposuretotheunderlying
assetsofderivatives.
Thereisnolookthroughtounderlying
assetsinrespectofindexderivatives,
providedtheindexmeetscertaincriteria.
(xi) Position Cover Requirements
Wherecashsettled,theUCITSmust
holdliquidassets(i.e.cashormoney
marketinstruments)ascover.
Wherephysicaldeliveryoftheunderlying
assetisrequiredforsettlement,theUCITS
mustholdthefollowingascover:
theunderlyingassetforthedurationof
thederivative;or
sufficientlyliquidassetswherethe
underlyingassetisahighlyliquidfixed
incomesecurityand/ortheUCITS
considersthattheexposurecanbe
adequatelycoveredwithoutholdingthe
underlyingasset,asdisclosedinthe
RMPandtheUCITS’prospectus.
(xii) Counterparty Exposure Limits
Thecounterpartyexposuremust
includeallexposurestothecounterparty
(i.e.exposurerelatedtoOTCderivatives
andanyotherexposuretothe
counterparty).Exposureislimitedto5%
ofnetassetvalueor10%inthecaseof
certaincreditinstitutionsasfollows:
acreditinstitutionauthorisedin
theEEA;
acreditinstitutionauthorisedwithin
asignatorystate(otherthanan
EEAMemberState)totheBasle
CapitalConvergenceAgreementof
July1998;or
acreditinstitutionauthorisedin
Jersey,Guernsey,theIsleofMan,
AustraliaorNewZealand.
Asindicatedabove,nettingmaybe
appliedasappropriatebeforecounterparty
exposureiscalculated.Inaddition,
riskwillbereducedwhereacounterparty
providesacceptablecollateraltothe
UCITS,inaccordancewiththeFinancial
Regulatorrequirements.
PAGE36
Counterpartiesmustagreetocloseout
positionsonrequestatfairvalue.
Exchange-tradedderivativesthatare
markedtomarketdailyandsubjectto
marginrequirementsaredeemedtobe
freeofcounterpartyrisk.
(xiii) Embedded Derivatives
Carealsoneedstobetakentoexamine
thetruenatureofparticularinstruments
todeterminewhetherthey“embed”
derivatives.Ifatransferablesecurityor
moneymarketinstrumentembedsa
financialderivativeinstrument(FDI),
thentheglobalexposure,issuer
concentrationandleveragecalculation
rulesreferredtoaboveapplytothe
embeddedFDIelementofthetransferable
securityormoneymarketinstrument.
ConsistentwithCESR’sconsideration
ofembeddedFDIinitsJanuary2006
advices,theFinancialRegulator’s
GuidanceNote3/03providesthat
atransferablesecurityandmoneymarket
instrumentwillbeconsideredtoembeda
FDIwhereitcontainsacomponentwhich
fulfilsthefollowingcriteria:
byvirtueofthatcomponentsome
orallofthecashflowsthatotherwise
wouldberequiredbythetransferable
securityormoneymarketinstrument
whichfunctionsashostcontractcan
bemodifiedaccordingtoaspecified
interestrate,financialinstrumentprice,
FXrate,indexofpricesorrates,credit
ratingorcreditindex,orothervariable,
andthereforevaryinawaysimilar
toastand-aloneFDI;
itseconomiccharacteristicsand
risksarenotcloselyrelatedtothe
economiccharacteristicsandrisks
ofthehostcontract;and
ithasasignificantimpactontherisk
profileandpricingofthetransferable
securityormoneymarketinstrument
in question.
BothCESRandtheFinancialRegulator
havenotedthatexamplesofstructured
financialinstrumentsthatmaybe
assumedtoembedaFDIare:
creditlinkednotes;
convertibleorexchangeablebonds;
structuredfinancialinstruments
whoseperformanceislinkedtothe
performanceof,forexample,abasket
ofsharesorabondindex,orstructured
financialinstrumentswithanominal
fullyguaranteedwhoseperformanceis
linkedtotheperformanceofabasket
ofshareswithorwithoutactive
management;
collateraliseddebtobligationsand
assetbackedsecuritiesthatcreate
leverage,i.e.theCDOisnotalimited
recoursevehicleandtheinvestors’
losscanbehigherthantheirinitial
investmentorarenotsufficiently
diversified.
PAGE37
UCITSusingUCITSstructuredfinancial
instrumentsembeddingFDImustrespect
theprinciplesoftheUCITSDirectivesand
theIrishUCITSRegulations,and
embeddedFDImaynotbeusedto
circumventthoseprinciplesandrules.
UCITSusingstructuredfinancial
instrumentsembeddingFDIshouldalso
refertotheCommissionRecommendation
ontheuseofFDIbyUCITSinorderto
complywiththeUCITSriskspreading
rulesasthisRecommendationsetsout
howtheunderlyingassetsofFDIshould
betakenintoaccountwhenassessing
compliancewiththerisklimitssetbythe
above-mentionedarticle.
Additionally,notethatembedded
derivativeswillgenerallynotbetakeninto
accountwhencalculatingcounterparty
limits,exceptiftheseproductsenable
theissuerofthehybridinstrumentto
passthecounterpartyriskofunderlying
derivativestotheUCITS.
ItistheresponsibilityoftheUCITSto
checkthatinvestmentinhybridinstruments
embeddingderivativescomplieswiththese
requirements.Thenature,frequencyand
scopeofchecksperformedwilldepend
onthecharacteristicsoftheembedded
derivativesandontheirimpactonthe
UCITS,takingintoaccountit’sstated
investmentobjectiveandriskprofile.
(xiv) Format and Content of Risk Management Process
TheRiskManagementProcess(RMP)
mustbepreparedinaccordancewith
theprovisionsofGuidanceNote3/03
andissubjecttoreviewandclearance
bytheFinancialRegulatorbefore
beingadopted.
TheRMPshouldgiveinformationon
thetradingprocessemployedbythe
investmentmanagerandexplainin
detailtheresponsibilitiesandexpertise
ofthepersonnelinvolvedinthederivative
tradingactivityoftheUCITS.Itshould
explainclearlythetypesofderivative
instrumentsusedbytheUCITSandtheir
specificpurpose.TheRMPmustcover
all derivatives used.
TheRMPshouldalsoexplainthe
following:
howthevariousexposures(global
exposureandleverage,counterparty
exposureetc.)aremeasured;
whatlimitsapplytoeach
suchexposure;
howtheselimitsaremonitored
andenforced;
howbreachesoflimitsarereported
andescalated.
Aworkedexampleofexposure
calculationsshouldalsobeprovided.
Thisshouldincorporateexamplesof
eachtypeofderivativeandalso
demonstratehowhedgingisused.
PAGE38
AnymaterialamendmentstotheRMP
mustbeaddressedinarevisedRMP
filedwiththeFinancialRegulator.Any
non-materialamendmentsorupdate
(forexamplechangeofpersonnelor
systems)shouldbeincludedinthe
annualderivativesreport.
(xiv) Annual Derivatives Report
UCITSNotice10requiresthataUCITS
mustsubmitanannualreporttothe
FinancialRegulatoronitsderivative
positions(anAnnualFDIReport)so
thattheFinancialRegulatormayreview
theuseofderivativesandanybreaches
ofrisk.
TheAnnualFDIReportshouldinclude
detailsofthefollowing:
summaryreviewontheuseof
derivativesbytheUCITSduring
theyear;
instancesofanybreachesofglobal
exposureduringtheyear,withan
explanationofremedialactiontaken
anddurationofthebreaches;
instancesofanybreachesof
counterpartyriskexposureduring
theyear,withanexplanationof
remedialactiontakenandduration
ofthebreaches;
whererelevant,asummaryof
non-materialupdatestotheRMP.
InthisinstancearevisedRMP
shouldbeattached.
InthecaseofUCITSusingVaR:
year-endVaRnumber(expressedas
apercentageofnetassetvalueofthe
UCITSorasapercentageofthe
benchmark/comparablederivatives
freeportfolio,asappropriate);
instancesofanybreachesinVaR
limitsduringtheyear,withan
explanationofremedialaction
anddurationofbreach;
confirmationastowhetherback-
testinghasbeensuccessfulin
accordancewiththerequirements
and,ifnot,whatactionstheUCITS
hastakentoaddressthesituation;
confirmationthattheUCITSdoes
haveastresstestingregime,an
overviewofthebroadassumptions
behindsuchtestingandacommentary
ontheresultsofthestresstestingand
itsapplicabilitytothedaytodayuse
ofthemodel.
PAGE39
UCITSinvestinginDerivatives on FinancialIndices
9
PAGE41
9.UCITSinvestinginDerivatives onFinancialIndices
TherearespecificUCITSrulesrelatingtowhat
willbeacceptableasapermittedfinancialindex
underlyingafinancialderivativeinstrument.The
requirementsarethattheindex:
mustbesufficientlydiversified;
mustrepresentanadequatebenchmark
forthemarkettowhichitrefers;
mustbepublishedinanappropriate
manner;and
mustbemanagedindependentlyfromthe
managementoftheUCITS.
TheFinancialRegulatorhasissuedaspecific
GuidanceNoteaddressingthoserequirements
indetail,asexplainedbelow.
(i) Prior Approval Required
Itwillbenecessarytosubmittherelevant
indextotheFinancialRegulatorforprior
approvalif(a)theindexiscomprisedof
ineligibleassetsor(b)theindexis
comprisedofeligibleassetsbutitwould
notbepossiblefortheUCITStoinvest
directlyinsuchunderlyingassetswithout
breachingtheUCITSriskspreadinglimits
(assumingtheUCITSdoesnotwishto
applyalookthroughapproach).Withany
suchsubmissionitwillbenecessaryto
demonstratetotheFinancialRegulator
thattheindexmeetsthefourprerequisites
listedabove,andexplainedfurtherbelow.
(ii) Sufficiently Diversified
Thegeneralrulerelatingtodiversification
aUCITSportfolioisthe5/10/40rulewhich
referstomaximumpermittedexposures
perissuer.Thisisprincipallyrelevantto
portfoliosoftransferablesecuritiesand
moneymarketinstrumentsbutdoeshave
relevancetoUCITSwhichusecommodity
indicesforriskdiversificationasopposed
totrackers.
TheUCITSIIIProductDirectivedidnot
explainhowthegeneraldiversificationrules
wouldapplytoindicesbasedonnon-eligible
financialinstrumentssuchascommodity
futuresbutthisissuewasaddressedin
theCESRadvicesofJanuary2006where
CESRnotedthatinthecaseofFDIon
financialindicesbasedonnon-eligible
assetsthattherulesbe“adaptedtothe
specificriskofsuchfinancialindices”.
CESRsuggestedthefollowingapproach:
whereFDIonanindexcomposedof
non-eligibleassetsareusedtotrackor
gainstrongexposuretotheindex,the
indexshouldbeatleastasdiversified
assetoutunderthediversificationratios
ofArticle22(a)(the20%weightingand
35%weighting);
whereFDIonanindexcomposedof
non-eligibleassetsareusedforrisk
diversificationpurposes,providedthe
exposureontheindividualcommodity
indicescomplieswiththe5/10/40ratios,
thereisnoneedtolookattheindividual
componentsoftheseindicestoensure
thattheyaresufficientlydiversified.
PAGE42
That20%/35%ruleallowsforamaximum
exposureof20%perissuerwithcapacity
fortheFinancialRegulatortopermitone
holdingtogoabove20%,ashighas35%
“wherethatprovestobejustifiedby
exceptionalmarketconditions”.Inother
words,thesehigherlimitswillbeavailable
percommodityexposureforUCITSseeking
totrackortakeahighexposuretoa
commoditiesfuturesindex.IntheJanuary
2006advicesCESRstatedthatwhen
assessingthesediversificationratios,
componentswhicharehighlycorrelated(i.e.
futuresonoiltradedondifferentregulated
markets)shouldbetreatedasgiving
exposuretothesamecommodity.Thiswas
not,however,repeatedintheimplementing
DirectiveorLevel3advices.
(iii) Adequate Benchmark
Therelevantindexmustmeasurethe
performanceofthegroupofassetsitis
purportingtorepresentandtherefore,in
thesubmissiontotheFinancialRegulator
ontherelevantindices,thereshouldbe
anexplanationastohoweachindex
meetsthatrequirement.
Informationtobeincludedshouldinclude
dataonconstituentselectioncriteria,
constituentpricecollectionprocedures,
assetallocationrulesandguidelinesetc.
Thereisalsoanexpectationthattheindex
willberevisedandrebalancedperiodically
toensurethatregulatoryrequirements
withregardtoallowedconcentrationlimits
aresatisfied.Informationmustalsobe
providedastohowtheindexcalculation
methodologyisverifiedandonanyfees
embeddedintheindex.
(iv) Publication in an appropriate manner
Theindexmustbepublishedinan
appropriatemanner.Thismeansthat
aninvestorshouldbeabletoaccess
relevantmaterialinformationontheindex
withease,forexample,viatheinternet.
Indexperformancemustbefreelyand
continuallyavailablesothat,totheextent
permittedbytheindexprovider,information
onmatterssuchasindexconstituents,
calculation,rebalancingmethodologies,
etc.shouldbeavailable.Informationthat
anindexproviderconsiderstobeofa
proprietaryandcommerciallysensitive
natureisnotexpectedtobepublished
inadetailedmanner.
(v) Independent Management
Theindexmustbeindependentlymanaged
fromthemanagementoftheUCITSandits
performancemustbecalculatedinan
independentenvironmentfreefromany
externalinfluences.
(vi) Hedge Fund Indices
Hedgefundindicesmayqualifyas“financial
indices”towhichexposurecanbetaken
throughfinancialderivativeinstruments
providedthattheymeettheindexcriteria
indicatedaboveandwhere:
theindexmethodologyhasasetof
predeterminedrulesandobjective
criteriafortheselectionandrebalancing
ofindexcomponents;
theindexproviderdoesnotaccept
paymentsfrompotentialindex
PAGE43
componentsforthepurposeofbeing
includedintheindex;and
back-filling(i.e.retrospectivechanges
topreviouslypublishedindexvalues)
isnotpermitted.
Thereareadditionalduediligencerequirements
imposeduponaUCITSwhichwishestogain
exposuretoahedgefundindexwhichrequires
thataUCITSconsidersthequalityoftherelevant
hedgefundindextakingintoaccount(atleast)
boththecomprehensivenessoftheindex
methodologyandavailabilityofinformation
regardingtheindexandaUCITSmustkeepa
recordoftheseassessments.
Indeterminingthecomprehensivenessofthe
indexmethodology,theUCITSshouldconsider
whetherthemethodologycontainsanadequate
explanationofmatterssuchastheweightingand
classificationofcomponentsandthetreatmentof
defunctcomponentsandwhethertheindex
representsanadequatebenchmarkforthekind
ofhedgefundstowhichitrefers.Inrelationtothe
availabilityofinformationregardingtheindex,
matterstobetakenintoaccountincludewhether
thereisaclearnarrativedescriptionofwhatthe
indexisseekingtorepresent,whethertheindex
issubjecttoanindependentauditandthescope
oftheauditaswellashowfrequentlytheindexis
publishedandwhetherthatwouldaffecttheability
oftheUCITStoaccuratelycalculateitsownNAV.
Considerationshouldalsobegiventothe
treatmentofindexcomponentsincludingthe
proceduresbywhichtheindexprovidercarries
outduediligenceontheNAVcalculation
proceduresoftheunderlyingindexcomponents,
thelevelofdetailavailableregardingindex
componentsandtheirNAVs(includingwhether
theyareinvestableornon-investableandwhether
thenumberofcomponentsintheindexachieves
sufficientdiversification).
NormalrulesregardingOTCderivatives,inthe
caseofexposuretoanindexbymeansofOTC
derivatives,apply.
AvailableLegalStructures
10
PAGE45
10. AvailableLegalStructures
UCITScanbeestablishedinIrelandas
variablecapitalinvestmentcompanies,
unittrusts,orascommoncontractualfunds
(*fixedcapitalinvestmentcompaniesare
alsoavailablebutnotinpracticeused).
Allthreelegalstructuresaresubjecttothe
standardUCITSinvestmentandborrowing
restrictions,thesameauthorizationprocess
andoperatingconditionsandeachmust
haveasitssoleobjectthecollective
investmentineligibleassetsofcapital
raisedfromthepublicandprovideforat
leastfortnightlyredemptionfacilities.
EachofthestructuresmusthaveanIrish
Administrator(responsibleforcalculationofthe
NAV,theaccountingfunctionandmaintenance
ofbooksandrecordsandusuallyincorporating
theTransferAgencyfunction)andanIrish
basedTrustee/Custodian(responsiblefor
safekeepingofassetsandperformanceof
certainfiduciarytypeduties).Mostwillappoint
anInvestmentManager(responsiblefor
discretionaryassetmanagementoftheUCITS
portfolio)andmanywillappointaGlobal
DistributororlocalDistributors.
Notwithstandingtheabovethereareanumber
ofdistinctionsbetweenthethreelegalstructures
assummarisedbelow.
(i) UCITS variable capital investment companies
UCITSvariablecapitalinvestment
companiesor“VCCs”arepubliclimited
liabilitycorporatevehicleswiththeirown
legalpersonality.InadditiontotheUCITS
RegulationstheyaresubjecttoIrish
companylaw(withrelevantexceptions)
asitappliestopubliclimitedcompanies.
Theirconstitutivedocumentisthe
MemorandumandArticlesofAssociation
andultimatemanagementauthorityresides
withaboardofdirectors,twoofwhom
mustbeIrishresident.VCCsissueshares
toinvestorswhichsharesdonotrepresent
alegalorbeneficialinterestintheVCCs
assets,thoseassetsbeinglegallyheldby
theCustodian,beneficiallybytheVCCitself.
UnlikebothunittrustsandCCFs,VCCsare
requiredtoconveneandholdanannual
generalmeetingofshareholdersandany
changestotheirMemorandumandArticles
ofAssociationrequireinvestorapproval.
Self-managedVCCsrequireaminimum
paidupcapitalof€300,000before
commencingoperationsandarealso
subjecttothe“substance”requirements
applicabletoManagementCompanies
(seeSection11below).
Investment Manager
InvestmentManager
InvestmentAdviser
InvestmentAdviser
Distributor
Distributor
LocalDistributor
LocalDistributor
InvestmentCompany
IrishManagementCompany
Box1–SelfManagedUCITSInvestmentCompany
Administrator/TA
Administrator/TA
Custodian
Custodian
GlobalCustodian
GlobalCustodian
InvestmentCompany
PAGE46
VCCsenterintocontractsthemselves
ascorporateentities,principallywiththe
InvestmentManager,Administratorand
Distributor(orviatheManagementCompany
ifnotself-managed)andwiththeCustodian.
VCCswhouseaManagementCompanydo
notneedtomeetthe“substance”orcapital
adequacyrequirementsforSMICs.
VCCscanbeestablishedasumbrellaschemes
andumbrellaVCCsaresubjecttospecific
statutoryprovisionsdealingwithsegregated
liabilitybetweensub-funds.
Box2–UCITSInvestmentCompanywithIrishManagementCompany
InvestmentManager
InvestmentAdviser
Distributor
LocalDistributor
IrishManagementCompany
Box3–UCITSUnitTrust
Administrator/TA
CustodianTrust Deed= =
GlobalCustodian
PAGE47
(ii) UCITS unit trusts
Unittrustsarecontractualarrangements
createdunderadeedoftrust(the“trust
deed”)madebetweentheManagement
CompanyandtheTrustee.Unittrustsdo
nothavetheirownlegalpersonality
andcontractsareenteredintoinrespect
ofunittrustsbytheManagementCompany
and,incertaincases,bytheTrustee.
Theultimatemanagementauthorityrests
withtheManagementCompanywhich
canactasManagementCompanyfor
multiplecollectiveinvestmentschemes
(UCITSandNon-UCITS;VCCs,unittrusts
andCCFs).TheManagementCompany
mustitselfbeauthorisedseparatelytothe
unittrust’sownUCITSauthorisationand
itmustmeetthe“substance”andcapital
adequacyrequirementsoutlinedinSection
11below.
Unit trusts issue units to investors and a
unitrepresentsanundividedbeneficial
interestintheassetsoftheunittrust.The
assetsarelegallyheldbytheTrustee.
Unittrustsarenotrequiredtoholdannual
investormeetingsand,providedboththe
ManagementCompanyandTrusteecertify
thatsuchchangesdonotprejudicethe
interestsofinvestors,changescanbemade
tothetrustdeedwithouthavingtoobtainprior
investorapproval.
PAGE48
(iii) UCITS Common Contractual Fund
ThecommoncontractualfundorCCFis
acontractualarrangementsimilartothe
FCP(FondsCommundePlacement)
structuresinotherEuropeanjurisdictions,
notablyLuxembourgandFrance,andthe
DutchFGR(FondsvoorGemeneRekening)
enablingtheassetsheldonbehalfof
investorstobemanagedthroughasingle
poolinproportiontotheassetsorcash
subscribedtothepool.
ACCFisconstitutedundercontract
lawbymeansofadeedofconstitution
(“deed”)executedundersealbythe
ManagementCompany.Thedeedprovides
forthesafekeepingofassetsoftheCCF
byaCustodian-whoisalsoapartytothe
deed–andspecifiesthefiduciary
responsibilitiesoftheCustodianwhichare
equivalenttothoseofcustodians/trustees
ofotherUCITSschemes.Thedeedalso
providesthattheCustodianwillbe
appointedonthetermsofacustodian
agreementtobeenteredintobythe
ManagementCompanyandCustodian.
Importantly,theCCFisanunincorporated
bodyanddoesnothavelegalpersonality.
BecauseaCCFdoesnothavelegal
personality,itmayactonlythroughthe
ManagementCompany(orinvestment
manager,ifauthorityisdelegatedtoan
investmentmanager).
ParticipantsintheCCFholdtheir
participationasco-ownersandeach
participantholdsanundividedco-ownership
interestas“tenantsincommon”withother
participants.A“tenancyincommon”isa
formofco-ownershipinwhichthejoint
owner(the“tenantincommon”)hasa
distinctbutundividedinterestorshareinthe
propertythesubjectoftheco-ownershipbut
withnorightofsurvivorship(e.g.ondeathof
oneco-owner)infavourofanyoftheother
jointowners(tenantsincommon).Investors
donothaveanybeneficialentitlementto
anyparticularasset,ratheraproportional
beneficialentitlementtoaninterestinthe
underlyingpoolofassets.
Toassistinachievingtaxtransparency
(thesecharacteristicsdifferentiateaCCF
fromanopaquecorporatebody),aCCF
willnormallyhavethefollowingadditional
characteristics:
incomederivedthroughthepooling
vehicleshouldbedistributedona
mandatorybasisannually,proratato
eachparticipant’sinvestmentinthe
CCF.Thisensuresthattheincomeis
bothaccountedforandtaxedonan
“arising”/currentbasis;
theCCFparticipantshouldbeprovided
withanannualbreakdownofincomeon
investmentsbytypeandsource;
noredemptionchargeshouldbelevied
onparticipants;
no“investor”meetings(i.e.meetings
similartoshareholdermeetings)should
bepermitted;
InvestmentManager
InvestmentAdviser
Distributor
LocalDistributor
IrishManagementCompany
Box4–CommonContractualFund(CCF)
Administrator/TA
Custodian
GlobalCustodian
CCFDeed=
PAGE49
theIrishtaxauthoritiesmustview
aCCFasatransparentvehiclefor
Irishtaxpurposes;
holdings/unitsinaCCFshouldnotbe
freelytransferablebutareredeemable.
Ithas,however,beenacceptedthat
unitsmaybetransferredinlimited
circumstances,i.e.withtheprior
consentof100%ofunitholdersand
theManagementCompany;and
assetsshouldbejointlyheld
byparticipantspro-ratato
theirinvestment.
(iv) Umbrellas, Sub-Funds and Classes
Whicheverlegalstructureischosen,UCITS
canbeestablishedassinglestand-alone
fundsandasumbrellafunds,andcanoffer
differentunitorshareclasseswithinafund,
thenormaldifferentiatingfactorsbeing
targetaudience(retail,professional,
institutional),minimumsubscription/holding
requirements,designatedcurrencyandfees.
Itisafundamentalprinciple,however,that
assets/liabilitieswithinasinglefundarenot
allocatedtoindividualclasses,butmaybe
“attributable”toclassesincertaincases
suchasinthecaseofhedgedcurrency
classeswherethegains/lossesare
attributedtotherelevantclasses,aswell
asotherclassliabilitiessuchasfees.
UCITSManagementCompanies/SMICs
11
PAGE 51
11.UCITSManagement Companies/SMICs UCITSestablishedasunittrustsorasCCFs
arerequiredtohaveanIrishManagement
Company.Thisisbecauseaunittrustiscreated
byaManagementCompanyandTrustee
enteringintoatrustdeedand,inthecaseof
aCCF,itisconstitutedcontractuallybythe
ManagementCompanyunilaterallyentering
intoadeedofconstitution.UCITSestablished
asinvestmentcompanieshavetheoptionas
towhetherornottoappointamanagement
company.UCITSwhichdonotappointa
managementcompanyareknownas“self-
managedinvestmentcompanies”(“SMICs”).
(i) Management Company
Inthefundmanagementindustry,
particularlywhendealingwithcollective
investmentschemes,theterms
“ManagementCompany”and“Investment
Manager”havedifferentmeanings,different
functionsanddifferentpassports.These
distinctionscanattimesbecomeblurred,
particularlysincetheintroductionofthe
UCITSIIIDirectives,butitisimportantto
understandthedifferenceasexplained
furtherbelow.(NOTE:Theterm“Manager”
and“ManagementCompany”areused
interchangeablyandrefertothe
sameentity).
Whenwerefertoa“Management
Company”wearereferringtotheentity
whichhastheultimateresponsibilityfor
themanagementofacollectiveinvestment
scheme.Thisoverallmanagementfunction
encompassesoverallcontrolofthe
collectiveinvestmentscheme,including
thediscretionaryinvestmentmanagement
function,thefundadministrationfunction
andthedistributionfunction.
IfaManagementCompanyisusedfor
acollectiveinvestmentscheme,the
contractualarrangementsarestructured
sothattheManagementCompanyis
mandatedtocarryoutinvestment
management,fundadministrationand
distributioninrespectoftheIrishdomiciled
collectiveinvestmentschemebutthe
reality,inmostcases,hasbeenthatthe
IrishManagementCompanydelegatesout
fundadministrationtoanIrishregulated
entity,delegatesoutthedistributionactivity
toadistributorinthejurisdictionwherethe
UCITSisbeingdistributedanddelegates
theinvestmentmanagementfunctiontoan
appropriatelyregulatedInvestmentManager
which,ifitisaEuropeanentity,wouldbe
authorisedinitsHomeEUMemberState
undertheMarketsinFinancialInstruments
Directive(“MiFID”).
A“self-managed”investmentcompany
orSMIC,asitsnamesuggests,doesnot
haveanIrishManagementCompanyand
insteaddirectlyappointstheAdministrator,
theCustodian,theInvestmentManager
andDistributor.
(ii) Expansion of Opportunities for UCITS Management Companies
SincetheintroductionoftheUCITSIII
ManagementCompanyDirective,UCITS
ManagementCompanieshavebeenable
toexpandtherangeofserviceswhichthey
canprovide,thetypesofclientstowhom
PAGE 52
theycanprovidesuchservicesandhave
(albeittoalimitedextent)obtainedthe
capacitytopassporttheirservicescross-
borderwithintheEU.
AUCITSIIIManagementCompanycan
beauthorisedforcollective portfolio
managementand,but not or,for individual
portfolio management.Thismeansthata
UCITSIIIManagementCompanycanactas
ManagementCompanytocollective
investmentschemesand,ifitwishesto
expanditsauthorisation,itcanalsoprovide
discretionaryassetmanagementservicesto
othertypesofclients(i.e.clientswhichare
notcollectiveinvestmentschemes)suchas
pensionfunds,corporates,insurance
companiesandretailinvestors.
SeeAppendixCforthefullrangeofservices
andanexplanationofthetermscollective
portfoliomanagementandindividual
portfoliomanagementastheyapplyto
UCITSManagementCompanies.
(iii) Management Company Passport
UndertheUCITSIIIManagementCompany
Directive,ManagementCompanieswere
grantedapassportwiththeintentionbeing
thatanIrishManagementCompanycould,
forexample,actasManagementCompany
ofaLuxembourgcorporatetypefund(no
passportwasgrantedtoactasManagement
Companyofaforeigncontractualtypefund
duetothelegalnatureofsuchfunds).In
practicetheManagementCompany
passporthasnotworkedforthepure
ManagementCompanyrole,although
ManagementCompanieshavebeenable
topassporttheinvestmentmanagement
elementofcollectiveportfoliomanagement
aswellasindividualportfoliomanagement,
ifauthorisedforthatservice.
Thecurrentpositionis,therefore,thata
UCITSIIItypeManagementCompanycan
beauthorisedtoactas:
ManagementCompanytoIrish
domiciledcorporatetypefundsand
contractualtypefunds(bothUCITS
andnon-UCITS);and
InvestmentManagertoIrishfunds
andnon-Irishfunds(eitherdirectlyor
bysub-delegation);
InvestmentManagertoothertypesof
Irishandnon-Irishclients(pension
funds,insurancecompanies,individual
managedaccounts,etc.)onadirect
ordelegatedbasis(providedthatitis
authorisedtocarryoutindividual
portfoliomanagement).
During2007proposalswerebrought
forwardtoaddresstheimplementation
oftheManagementCompanypassport
provisionsfromUCITSIIIaswellasto
addresscertainotherUCITSstructural
issues,principallycrossbordermergers
ofUCITSandmasterfeederstructures,
theseproposalsbeingreferredtoas
“UCITSIV”,asfurtherdescribedbelow.
AttherequestoftheEuropean
Commission,CESRissuedacallfor
PAGE 53
evidenceontheManagementCompany
passportissue.Furtherdevelopmentsin
thisareaareexpected.
(iv) “Substance” Requirements
AUCITSIIIManagementCompanycannot
bean“emptybox”,mustbemanagedbyat
leasttwopersonsandmustperformthe
followingeightkeymanagementfunctions:
Decision taking:theremustbeclear
responsibilityandcompetencein
relationtoallmaterialdecisionsaffecting
theoperationandconductofbusiness
oftheManagementCompany.Generally
speaking,theFinancialRegulator
considersthatkeystrategicandmaterial
issues/decisionsrelatingtothe
ManagementCompanyshouldbe
consideredbyitsboardofdirectors;
Monitoring compliance:itmustputin
placeproceduresdesignedtoensure
compliancewithallapplicablelegaland
regulatoryrequirements;
Risk Management:itmustputinplace
proceduresdesignedtoensurethatall
applicableriskspertainingtotheUCITS
canbeidentified,monitoredand
managedatalltimes;
Monitoring of Investment Performance:
itmustputinplaceproceduresto
ensureavailabilityofup-to-date
informationonportfolioperformance;
Financial Control:itmustputinplace
procedurestoensureallrelevant
accountingrecordsareproperly
maintainedandarereadilyavailable
includingproductionofannualand
half-yearlyfinancialstatements;
Monitoring of Capital:itmustput
inplaceprocedurestoensure
compliancewithapplicablecapital
adequacyrequirements;
Internal Audit:itmustputinplace
procedurestoensureeffectiveinternal
auditprocedures;and
Supervision of Delegates:itmust
haveclearstructuresinplaceforthe
ongoingmonitoringofworkdelegated
tothirdparties.
ItisimportanttonotethatbothManagement
CompaniesandSMICsarerequiredto
demonstratecompliancewiththeabove
eightmanagementrequirements.
Inadvanceofcommencingoperations,
aManagementCompanymustsubmita
detailedApplicationforAuthorisationanda
BusinessPlantotheFinancialRegulator
settingouthowtheabovefunctionsare
goingtobeperformed,bywhom,whereand
whatreportinglinesareputinplace.The
eightfunctionshavetobecarriedoutbyat
least2peoplewhocanbe:-
employeesbasedinIreland
(notabroad);
PAGE54
fromanIrishthirdpartyengagedto
providetheservicesinIreland;or
boardmemberswhocancarryoutthe8
functions,providedthatatleastsomeof
thefunctionsarecarriedoutbyIrish
residentdirectors.
(v) Capital Adequacy
ThecapitalrequirementforaUCITS
ManagementCompanyisthehigherof
(i) theinitialcapitalrequirementof€125,000
plustheownfundsrequirement(i.e.
0.02%oftheamountofassetsunder
managementinexcessof€250m);and
(ii)onequarterofitsprecedingyear’s
fixedoverheads.
Theaggregateoftheinitialcapital
requirementof€125,000plustheown
fundsrequirementtobemaintainedbya
ManagementCompanyissubjecttoa
maximumof€10million.
TheFinancialregulatorrequiresthata
UCITSIIIManagementCompanymaintain
thehigherof:-
(i) theinitialcapitalrequirementof
€125,000;or
(ii) onequarterofitsprecedingyear’s
fixedoverheads.
(i.e.theeligibleassetsrequirement)in
cashand/orliquidassetsoutsidethe
ManagementCompany’sGroup.
Theminimumcapitalrequirementfora
SMICis€300,000anditisnotsubjectto
thefixedoverheadsortheadditionalown
fundsrequirements.
(vi) Authorisation Procedure
TheapplicationprocessforaUCITS
IIIManagementCompanyengagedin
collectiveportfoliomanagementonly
andwhichdelegatesoutthefund
administration,assetmanagementand
distributionfunctionstothirdpartiesis
assetoutbelow.Aninitialmeetingwith
theFinancialRegulatorshouldbeorganised
tointroducetheparentgroup.Thiswillbe
followedbypreparation,completionand
filingwiththeFinancialRegulatorofthe
followingdocuments:
formalApplicationforAuthorisation
(thereisaspecificapplicationform
forthispurpose);
detailedBusinessPlansettingout
thelegalnatureoftheManagement
Company,typesofactivitieswhichit
proposescarryingon,itsorganisational
structure,howitwillperformtheeight
oversightfunctions,threeyearfinancial
projections,detailsofproposed
capitalisation,overallgroupstructure,
sampleoftransactionflowsforthe
typeoftransactionstowhichitwill
beengaged;
IndividualQuestionnairesfor
eachofitsproposedDirectors
andseniormanagementincluding
ComplianceOfficer;
PAGE 55
CodeofConduct,Anti-Money
Launderingprocedures,reporting
linesetc;
Groupstructuredetails(considerable
informationmayberequired).
Followingreviewofthesedocumentsthe
FinancialRegulatorwillthenenterinto
correspondencewiththeapplicantwhich
regularlytakestheformofsubmitting
additionaldocumentationandproviding
clarificationswhererequired.Ifindividual
portfoliomanagementisalsotobecarried
out,theApplicationandBusinessPlan
becomemorelikeaMiFIDtypeapplication.
Forreasonablycompleteapplications,the
normalauthorisationtimeisapproximately
fourmonths.
UCITSIV
12
PAGE57
12.UCITSIV InMarch2007,theEuropeanCommission
publishedanumberofpapersoutlining
possibleadjustmentstotheUCITSDirective.
Thesepapersincludedinitialsuggestionson
howtoaddressthenon-implementationofthe
ManagementCompanypassportprovisions
fromUCITSIIIaswellassuggestionsasto
howtoaddresscertainotherUCITSissues
suchascross-bordermarketingoffunds,
fundmergersandassetpooling,
improvementofproductdisclosuresand
strengtheningsupervisorycooperation
mechanisms,theseproposalscollectively
referredtoas“UCITSIV”.
Whiletherewaswideagreementwithregard
tomostoftheCommission’sproposedchanges,
therewassignificantdebatewithregardtothe
ManagementCompanypassportproposal,with
differingviewsastowhetherafullorpartial
ManagementCompanypassportwasthe
mostappropriatewayforward.
InJuly2008,theEuropeanCommission
issuedanannouncementadvisinghow
itintendstobringforwardtheUCITSIV
proposalsandsettingoutitsintentionto
replacetheexistingDirectiveswithanew
singletext.Thisproposalhasbeenpassed
totheEuropeanParliamentandCouncil
forconsideration.
TheproposedchangestotheUCITS
Directivewill:
(i) Remove administrative barriers to the
cross-border distribution of UCITS funds
Currentcross-bordernotificationprocedures
cantakeseveralmonthsbeforecompleted
(andentailunnecessaryred-tapeand
administrativecosts).Theproposednew
notificationprocedurewillbereducedto
asimple,electronic,regulator-to-regulator
communicationwiththedistribution
immediatelyaftersuchcommunication.
(ii) Create a framework for mergers
between UCITS funds and allow the
use of master-feeder structures
Fundmergerswillbeallowed,onbotha
domesticandacross-borderbasis,and
theirauthorisationprocedurewillbe
harmonised,aswilltherequiredlevel
ofinformationtobeprovidedtoinvestors.
Subjecttoapprovalandtheappropriate
informationofinvestors,aUCITSfund
(feeder)willbeallowedtofullyinvestits
assetsintoanotherfund(master).
(iii)Replace the Simplified Prospectus
by a Key Investor Information (KII)
TheKIIistobecontainedinashort
documentconveyingkeyfactstoretail
investorsinaclearandunderstandable
mannersoastoassisttheminmaking
aninformedinvestmentdecision.
(iv)Introduce further cooperation
mechanisms between the
national supervisors
PAGE58
AsregardstheManagementCompany
passport,theCommissionpointedoutin
theirJuly2008announcementthatthe
mostrecentconsultationprocessrevealed
thatthereareanumberofpotential
supervisoryandinvestorprotection
concernswhichneedtobetackled.The
Commission,therefore,decidedtoconsult
withCESRontheseissuesandtoseek
advicetoassisttheCommissiontodevelop
provisionspermittingtheintroductionof
aManagementCompanypassportunder
conditionsthatareconsistentwithhigh
levelofinvestorprotection.Following
thatadvice,theCommissionintendsto
bringforwardanappropriateproposalin
timetoallowforitsadoptionduringthe
currentEuropeanParliament’sterm.
PAGE59
TaxationofUCITS in Ireland
13
PAGE61
13. TaxationofUCITSinIreland
Irelandhasaveryfavourabletaxationregime
forUCITSandindeedfundsingeneral.AllIrish
funds(UCITSorNon-UCITS)whethertheyare
constitutedascorporateentities,unittrusts
orinvestmentlimitedpartnershipsaresubject
tothesametaxationregimesolongasthey
aredesignatedasInvestmentUndertakings
underSection739BoftheTaxesConsolidation
Act1997(asamended)(the“TCA”).
Irish Direct Tax & Withholding Tax
InvestmentUndertakings(“funds”)arenot
subjecttoIrishtaxationonanyincomeor
gainstheymayrealisefromtheirinvestments.
Inaddition,therearenoIrishwithholding
taxesinrespectofadistributionofpayments
byfundstounitholdersoranyencashment,
redemption,cancellationortransferofunits
inrespectofunitholderswhoareneitherIrish
residentnorordinarilyresidentinIreland
andwhohaveprovidedthefundwiththe
appropriaterelevantdeclarationofnon-Irish
residenceorindeedinrespectofcertain
categoriesofexemptIrishinvestors(e.g.
approvedpensionschemes,charities,other
investmentundertakings,etc)whohavealso
madetheappropriatedeclarationtothefund.
When,however,adistributionismadebythe
fundtoIrishresidentunitholders(oranordinarily
Irishresidentunitholder)whodonotfallwithin
anyoftheexemptIrishinvestorcategories,or
suchaunitholderdisposesofunitsandrealises
again,taxmustbedeductedbythefundata
rateof20%ondistributions(wherepayments
aremadeannuallyoratmorefrequentintervals)
or23%(stdrateplus3%)onanyother
distributionorgainarisingtotheunitholder.
Stamp Duty
NostampdutyispayableinIrelandonthe
issue,transfer,repurchaseorredemptionof
unitsinafund.Furthermore,nostampduty
ispayablebythefundontheconveyance
ortransferofstockormarketablesecurities
providedthatthestockormarketablesecurities
inquestionhavenotbeenissuedbyacompany
registeredinIrelandandprovidedthatthe
conveyanceortransferdoesnotrelateto
anyimmovablepropertysituatedinIreland
oranyrightoverorinterestinsuchproperty
ortoanystocksormarketablesecuritiesof
acompany(otherthanacompanywhich
isanfund)whichisregisteredinIreland.
Whereanysubscriptionfororredemptionof
unitsissatisfiedbytheinspecietransferof
securities,propertyorothertypesofassets,
considerationshouldbegiventowhether
Irishstampdutymayariseonthetransferof
suchassets(inmostcasesitshouldnot).
VAT
TherearewiderangingVATexemptionswith
regardtotheprovisionofservicestofunds(e.g.
administration,transferagency,investment
management,custodial,etc)andtotheextent
thatafundsuffersIrishVAToncertainservices
itreceives(e.g.auditandlegalfees)thefund
mayrecoverthisVATbasedonitsrecovery
rate.Therecoveryratewillbebasedoneither
(i)theextentthatsecuritiesofthefundare
investedoutsidetheEUor(ii)theextentthat
theinvestorsinthefundarelocatedoutside
PAGE62
theEU.TheIrishTaxAuthoritiespreferto
ruleonthefund’sVATrecoverypositionby
referencetowherethesecuritiesofthefund
areinvested,ratherthanwheretheinvestors
inthefundarelocated.Nevertheless,
whicheverbasisisused,itmustbeapplied
consistentlyfromoneperiodtothenext.
Compliance requirements
Fundshaveanobligationtoregisterwiththe
IrishTaxAuthoritiestoobtainataxreference
numberaseachfundmustfilebi-annualtax
returnswiththeIrishTaxAuthorities.These
taxreturnsshouldbeaccompaniedbythe
paymentofappropriatetax(ifapplicable)for
theperiodinquestion.Onthebasisthatthere
arenoIrishresidentorordinarilyresident
unitholders(orsuchunitholdersareexemptIrish
investors)theappropriatetaxshouldbenil.
Certainservicesreceivedfromabroad(e.g.the
serviceofnon-Irishlawyersoraccountants)
willrequireafundtoregisterandselfaccount
forVATinIreland.However,dependingon
thefund’sVATrecoveryratethefundmaybe
abletorecoversomeorallofthisIrishVAT.
PAGE63
UCITSAuthorisationProcess
14
PAGE65
14.UCITSAuthorisationProcess
TheauthorisationprocessforUCITShastwo
parts,onedealingwiththepromoterofand
serviceproviderstotheUCITSandthe
seconddealingwiththeUCITSproductitself.
A. Approval of Service Providers
InadditiontotheManagementCompany
(asoutlinedabove),theprincipalservice
providerstoaUCITSaretheInvestment
Manager,AdministratorandtheTrustee/
Custodian.Theentitypromotingthe
UCITSmustalsobeapproved.
(i) Promoter
Beforeanapplicationforauthorisation
ofaUCITScanbeconsidered,the
FinancialRegulatormustbesatisfiedthat
thePromoteroftheUCITSisacceptable
toit.TheFinancialRegulatorregardsthe
Promoterasbeingthedrivingforcebehind
theproduct(i.e.theentitywithoutwhomthe
UCITSwouldnotbebroughttothemarket).
Promotersmustbeofgoodreputeand
shouldhaveasignificantleveloffinancial
resources(atleast€635,000)anda
demonstrableandrelevanttrackrecord
inthepromotionoffunds.Inconsidering
thesuitabilityofthePromoterofaUCITS,
theFinancialRegulatorrequiresdetailed
informationtoenableitgainan
appreciationofthePromoterandthe
natureofitsbusiness.Informationtobe
providedincludes:
detailsofthemainactivitiesofthe
Promotersinceitsestablishment;
itsexperienceandexpertiseinthe
promotionandmanagementof
collectiveinvestmentschemes;
ownershipdetails;
detailsofdistributionnetworks;
latestauditedaccountsinrespectof
thePromoteranditsultimateowners;
confirmationthatthePromoteris
regulatedinitshomejurisdiction;and
auditors’confirmationthatthePromoter
hasadequatefinancialresources.
(ii) Investment Manager
WheretheassetmanagementofaUCITS
is,asisusual,delegatedtoathirdparty
InvestmentManager,theUCITSDirective
imposestwoprincipalrequirements.
Firstly,onlyInvestmentManager,whoare
authorisedorregisteredforthepurpose
ofassetmanagementandwhoaresubject
toprudentialsupervisionmaybeappointed.
Secondly,whereanon-EUInvestment
Managerisappointed,theremustbea
formofco-operationinplacebetweenthe
FinancialRegulatorandthesupervisory
authoritiesofthethirdcountry
InvestmentManager.
IftheInvestmentManagerisanentity
authorisedtocarryoutdiscretionaryasset
managementunderMiFID,theFinancial
Regulatorwillnotapplyadetailedreview
andapprovalprocessbutratherwillrequire
confirmationfromtheHomeStateregulator
PAGE66
thattheInvestmentManagerhasthe
appropriateregulatorystatus.
IftheInvestmentManagerisnotauthorised
tocarryoutdiscretionaryassetmanagement
underMiFID(suchasUS,Japaneseetc
InvestmentManagers),theFinancial
Regulatorwillnormallyapplyadetailed
reviewandapprovalprocess.Inbothcases,
adetailedapplicationforapprovalneedsto
besubmitted.WhereaPromoteralsoacts
asInvestmentManager,aseparate
applicationforapprovaltoactas
InvestmentManagerisnotrequired.
(iii) Administrator
TheAdministratorofaUCITSmustbe
incorporatedinIrelandandauthorisedby
theFinancialRegulatortoprovide
administrationservicesunderthe
InvestmentIntermediariesAct,1995(as
amended)and/orMiFID.Therearecertain
“minimumactivities”whichmustbecarried
outbytheAdministratorinIreland,which
cannotbedelegatedtoanentityoutside
Ireland.Derogationsfromtheseminimum
activitiesrequirementsmaybesoughton
acasebycasebasis.Theminimum
activitiesrulesmaychangeintheevent
theManagementCompanypassport
isimplemented.
(iv) Custodian/Trustee
ThecustodianofaUCITSmustbea
creditinstitutionauthorisedinIreland,an
IrishbranchofanEUcreditinstitutionor
anIrishincorporatedcompanywhichis
whollyownedbyanEUcreditinstitution
(orequivalentfromanon-EUjurisdiction)
providedthattheliabilitiesoftheIrish
companyareguaranteedbyitsparent.
Acustodian/trusteeofanIrishUCITS
hasadualrole(i)to“oversee”themanner
inwhichtheUCITSismanagedand(ii)to
safe-keeptheassetsoftheUCITS,ineach
caseinaccordancewiththerequirements
setdownbytheFinancialRegulator.
B. UCITS Documentation Requirements
Thefollowingdocumentsarerequiredtobe
submittedtotheFinancialRegulatorinsupport
ofanapplicationforauthorisationofaUCITS:
FinancialRegulatorApplicationfor
AuthorisationofaUCITS
Business Plan
Prospectus
MemorandumandArticlesofAssociation/
TrustDeed/CCFDeed*
CustodianAgreement*
AdministrationAgreement
InvestmentManagement/
AdvisoryAgreement
DistributionAgreement(optional)
PlacingAgreement(optional)
PAGE67
DerivativesRiskManagementProcess
IndividualQuestionnairesfordirectorsof
VCCorManagementCompany
AncillaryLetters
SimplifiedProspectus**
*the documentation required will vary
depending on the structure of the UCITS
i.e. if it is established as a variable capital
investment company, a unit trust or CCF.
**The Simplified Prospectus is intended to
provide investors with key elements of the
Prospectus in a readily accessible form.
Following first year of operation the Simplified
Prospectus should also contain performance
data, portfolio turnover rate and TER (total
expense ratio) figures for the UCITS.
Notethatcertaindocumentationforvariable
capitalinvestmentcompaniesandifnew,
ManagementCompanieswillalsoneedtobe
submittedtotheCompaniesRegistrationOffice.
C. Timing
Onaverageittakesapproximately6-8weeks
fromdateofinitialsubmissionofanapplication
totheFinancialRegulatorforauthorisationof
theUCITStoissue.
D. Regulatory Fees
TheFinancialRegulatorimposesanannual
industryfundinglevyoncollectiveinvestment
schemes.Rates(attimeofwriting)includean
annualfeeof€2,200whetheranumbrellaor
asinglestructurefund.Umbrellafundsalso
payacontributionof€550persub-fundon
thefirstfivesub-fundsresultinginamaximum
contributionforumbrellafundsof€4,950.
OngoingSupervisionandGeneralRegulatory
Requirements
15
PAGE69
15. OngoingSupervision andGeneralRegulatory Requirements
Setoutbelowisasummaryoftheprincipal
ongoingsupervisionandgeneralregulatory
requirementsforUCITS.
(i) Prospectus and Simplified Prospectus
AUCITSisrequiredtopublishaSimplified
ProspectusandfullProspectusbothof
whichmustbedatedandtheessential
elementsofwhichmustbekeptuptodate.
TheSimplifiedProspectusmustbeoffered
toinvestorsfreeofchargebeforethe
conclusionofacontract,withthefull
Prospectusbeingsuppliedtoinvestors
freeofchargeuponrequest.
Bothmustcontainsufficientinformationfor
investorstomakeaninformedjudgment
oftheinvestmentproposedtothemand
inparticularoftherisksattachedtothat
investmentandthefullProspectusmust
includeaclearandreadilycomprehensible
explanationoftheUCITS’riskprofile.
AdditionalrequirementsforProspectuses
aresetoutinUCITS6.4.Guidance
Note1/05dealsfurtherwiththeSimplified
Prospectus,howitsinformationshouldbe
laidoutandwhatitshouldcontainincluding
performancedata,TERdata,portfolio
turnoverrateandgeneralrequirements
astokeepingtheSimplifiedProspectus
uptodate.
(ii) Publication of Annual and Half-Yearly Reports
UCITSarerequiredtopublishanannual
auditedreportforeachfinancialyearand
anunauditedsemi-annualorhalf-yearly
report.Theannualreportmustbepublished
withinfourmonthsoftheyearend,the
semi-annualwithintwomonthsoftheperiod
endandbothmustbesenttotheFinancial
Regulator.Bothmustalsobeofferedto
investorsfreeofchargebeforethe
conclusionofacontractandsuppliedto
investorsfreeofchargeuponrequest.
Thereisalsoarequirementformonthly
statisticstobeprovidedtotheFinancial
Regulatornormallythroughthe
Administrator.
(iii) Related Party Dealings
TheFinancialRegulatorhassetout
specificrulesforrelatedpartydealings–
transactionscarriedoutwithaUCITSby
itspromoter,managementcompany,
trustee,investmentmanagerorby
associatedorgroupcompanies.The
generalprincipleisthatthesehaveto
becarriedoutasifeffectedonnormal
commercialterms,negotiatedatarm’s
lengthandmustbeinthebestinterests
oftheinvestors.Therearespecific
limitationsimposedaroundsuch
transactions.
(iv) Board Appointments
BoardappointmentstoUCITSVCCsand
toManagementCompaniesrequireprior
approvalbytheFinancialRegulator.
PAGE70
DeparturesfromtheBoardofDirectors
mustbenotifiedtotheFinancialRegulator
immediatelyandthereisaprohibition
oncommondirectorsbetweentheVCC/
ManagementCompanyandtheBoardof
DirectorsoftheTrustee.Twodirectors
mustbeIrishresident.
(v) Valuation Rules
TheFinancialRegulatorhassetoutspecific
rulesforthevaluationofassetsofUCITSin
itsUCITSNotices,withfurtherclarification
initsGuidanceNotes.
(vi) Changes of Investment Objectives and Policies
Changesofinvestmentobjectivesand
materialchangesofinvestmentpolicy
arerequiredtobeapprovedinadvance
onthebasisofamajorityofvotescastat
ageneralmeetingofinvestorswitha
reasonablenotificationperiodbeing
providedbytheUCITStoallowinvestors
redeemtheirholdingpriortoimplementation
ofthechanges.Inthiscontext,theterm
“material”istakentomean,althoughnot
exclusively,“changeswhichwould
significantlyaltertheassettype,credit
quality,borrowinglimitsorriskprofile
oftheUCITS”.
PAGE71
Appendices
16
PAGE73
AppendixA
TransferableSecuritiesandMoneyMarketInstruments
A. Transferable Securities
(i) UCITS III Definitions
Theterm“transferablesecurities”isdefined
intheUCITSProductDirectiveasbeing:
sharesincompaniesandother
securitiesequivalenttosharesin
companies(“shares”);
bondsandotherformsofsecuritised
debt(“debtsecurities”);
othernegotiablesecuritieswhich
carrytherighttoacquireanysuch
transferablesecuritiesbysubscription
orexchange;
otherthanthepermittedUCITSefficient
portfoliomanagementtechniques
andinstruments.
(iii) Clarification by Eligible Asset Directive
In2007theEligibleAssetsDirective
clarifiedtheabovedefinitionbyproviding
thatthereferencetotransferablesecurities
“shallbeunderstoodasareferenceto
financialinstruments”whichfulfilthe
followingcriteria:
(a) thepotentiallosswhichtheUCITS
mayincurwithrespecttoholding
thoseinstrumentsislimitedtothe
amountpaidforthem;
(b) theirliquiditydoesnotcompromise
theabilityoftheUCITStocomply
withitsobligationtoprovideatleast
fortnightlyredemptionfacilities;
(c) reliablevaluationisavailableforthem
asfollows:
(i) inthecaseofsecuritiesadmittedto
ordealtinonaregulatedmarketinthe
formofaccurate,reliableandregular
priceswhichareeithermarketprices
orpricesmadeavailablebyvaluation
systemsindependentfromissuers;
(ii) inthecaseofothersecurities(i.e.
theaggregate10%thatcanbe
investedintransferablesecurities
andmoneymarketinstrumentsnot
specificallyreferredtoinArticle19(1)),
intheformofavaluationonaperiodic
basiswhichisderivedfrominformation
fromtheissuerofthesecurityorfrom
competentinvestmentresearch;
(d) appropriateinformationisavailablefor
themasfollows:
(i) inthecaseofsecuritiesadmittedto
ordealtinonaregulatedmarketas
referredtoinsubparagraphs(a)to(d)
ofArticle19(1),intheformofregular,
accurateandcomprehensive
informationtothemarketonthe
securityor,whererelevant,onthe
portfolioofthesecurity;
(ii) inthecaseofothersecuritiesas
referredtoinArticle19(2),intheform
ofregularandaccurateinformationto
theUCITSonthesecurityor,where
relevant,ontheportfolioofthesecurity;
PAGE74
(e) theyarenegotiable;
(f) theiracquisitionisconsistentwiththe
investmentobjectivesortheinvestment
policy,orboth,oftheUCITS;
(g) theirrisksandtheircontributionto
theoverallriskprofileoftheportfolio
areadequatelycapturedbytherisk
managementprocessoftheUCITS
whichmustbeassessedonan
ongoingbasis.
Forthepurposeofsubparagraphs(b)and
(e),andunlessthereisinformationavailable
totheUCITSthatwouldleadtoadifferent
determination,financialinstrumentswhich
areadmittedordealtinonaregulated
marketinaccordancewithArticle19(1)shall
bepresumednottocompromisetheability
oftheUCITStocomplywithitsredemption
facilityrequirementsandshallalsobe
presumedtobenegotiable.
Forthepurposesofsubparagraph(b)
above,whereinformationisavailable
totheUCITSthatwouldleaditto
determinethatatransferablesecurity
couldcompromisetheabilityofthe
UCITStocomplywithitsredemption
facilityrequirements,theUCITSmust
assessitsliquidityrisk.
TheliquidityriskisafactorthattheUCITS
mustconsiderwheninvestinginany
financialinstrumentinordertobecompliant
withtheportfolioliquidityrequirementto
theextentrequiredbyitsredemptionfacility
requirements.Intakingthisprudent
approach,thefollowingareexamplesof
themattersaUCITSmayneedtoconsider:
thevolumeandturnoverinthe
transferablesecurity;
ifpriceisdeterminedbysupplyand
demandinthemarket,theissuesize,
andtheportionoftheissuethatthe
assetmanagerplanstobuy;also
evaluationoftheopportunityand
timeframetobuyorsell;
wherenecessary,anindependent
analysisofbidandofferpricesovera
periodoftimemayindicatetherelative
liquidityandmarketabilityofthe
instrument,asmaythecomparability
ofavailableprices;
inassessingthequalityofsecondary
marketactivityinatransferablesecurity,
analysisofthequalityandnumber
ofintermediariesandmarketmakers
dealinginthetransferablesecurity
concernedshouldbeconsidered.
Inthecaseoftransferablesecuritieswhich
arenotadmittedtotradingonaregulated
market,liquiditycannotautomaticallybe
presumed.AUCITS,therefore,needsto
assesstheliquidityofsuchsecuritieswhere
thisisnecessarytomeettherequirements
ofitsredemptionfacilityrules.
Inthecaseoftransferablesecurities
whicharenotadmittedtotradingona
regulatedmarket,negotiabilitysimilarly
cannotautomaticallybepresumed.The
PAGE75
UCITSmustassessthenegotiabilitycannot
automaticallybepresumed.TheUCITS
mustassessthenegotiabilityofsecurities
heldintheportfolio,withaviewtoensuring
compliancewiththerequirementsofits
redemptionfacilityrules.
(iii) Closed Ended Funds as Transferable Securities
TheEligibleAssetsDirectivehasmadeit
clearthatcertainclosed-endedfundswillfall
withinthe“transferablesecurities”definition
andthereforebeeligibleforinvestmentby
UCITSastheterm“transferablesecurities”
includes:
(a) unitsinclosed-endedfundsconstituted
asinvestmentcompaniesorasunit
trusts,whichfulfilthefollowingcriteria;
(i) theyfulfilthecriteriasetoutinSection
(ii)abovetitled“ClarificationbyEligible
AssetsDirective”above;
(ii) theyaresubjecttocorporate
governancemechanismsapplied
tocompanies;
(iii)whereassetmanagementactivityis
carriedoutbyanotherentityonbehalf
oftheclosedendedfund,thatentityis
subjecttonationalregulationforthe
purposeofinvestorprotection.
(b) unitsinclosed-endedfundsconstituted
underthelawofcontractwhichfulfilthe
followingcriteria:
(i) theyfulfilthecriteriasetoutinSection
(ii)abovetitled“ClarificationbyEligible
AssetsDirective”above;
(ii) theyaresubjecttocorporate
governancemechanismsequivalentto
thoseappliedtocompaniesasreferred
toinsubparagraph(a)(ii)above;
(iii) theyaremanagedbyanentitywhich
issubjecttonationalregulationforthe
purposeofinvestorprotection.
Inassessingwhetherthecorporate
governancemechanismsforclosedended
fundsincontractualformareequivalentto
investmentcompanies,thefollowingfactors
arestatedbytheFinancialRegulatortobe
indicatorswhichcanbeusedasaguidance:
Unitholders’ rights.Thecontractonwhich
thefundisbasedshouldprovidefor:
(i) righttovoteoftheunitholdersinthe
essentialdecisionmakingprocessesof
thefund(includingappointmentand
removalofassetmanagementcompany,
amendmenttothecontractwhichset
upthefund,modificationofinvestment
policy,merger,liquidation);
(ii) righttocontroltheinvestmentpolicyof
thefundthroughappropriatemechanisms.
Segregation of assets.Theassetsofthe
fundshouldbeseparateanddistinctfrom
thatoftheassetmanagerandthefundmust
besubjecttoliquidationrulesadequately
protectingtheunitholders.
PAGE76
AUCITSmaynotmakeinvestmentin
closedendedfundsforthepurposes
ofcircumventingthenormalUCITS
investmentlimits.
(iv) Structured Financial Instruments
“Transferablesecurities”alsoinclude
financialinstrumentswhich:
(i) fulfilthecriteriasetoutinSection(ii)
titled“ClarificationbyEligibleAssets
Directive”above;
(ii) arebackedby,orlinkedtothe
performanceof,otherassets,which
maydifferfromthosereferredtoin
Article19(1);providedthatwherea
financialinstrumentcoveredbythis
subparagraphcontainsanembedded
derivativecomponent,therequirements
regardingthederivativesrisk
managementprocess,global
exposureandaggregationofdirect
andindirectexposuresshallapply
tothatcomponent.
B. Money Market Instruments
Thistermmeans“instruments normally
dealt in on the money market which
are liquid, and have a value which can be
accurately determined at any time”.These
shallbeunderstoodbyareferencetothe
followingparagraphs:
(i) financialinstrumentswhichare
admittedtotradingordealtinon
aregulatedmarket(inaccordance
withsubparagraphs(a),(b)and(c)
ofArticle19);
(ii) financialinstrumentswhicharenot
admittedtotrading.
Thereferencetomoneymarketinstruments
as “instruments normally dealt in on the money
market”shallbeunderstoodasareference
tofinancialinstrumentswhichfulfiloneofthe
followingcriteria:
(a) theyhaveamaturityatissuanceofupto
andincluding397days;
(b) theyhavearesidualmaturityofuptoand
including397days;
(c) theyundergoregularyieldadjustmentsin
linewithmoneymarketconditionsatleast
every397days;
(d) theirriskprofile,includingcreditandinterest
raterisks,correspondstothatoffinancial
instrumentswhichhaveamaturityas
referredtoinsubparagraphs(a)or(b),or
aresubjecttoayieldadjustmentasreferred
toinsubparagraph(c).
Thereferencetomoneymarketinstruments
as “instruments which are liquid”shallbe
understoodasareferencetofinancial
instrumentswhichcanbesoldatlimited
costinanadequatelyshorttimeframe,
takingintoaccounttheobligationofthe
UCITStorepurchaseorredeemitsunits
attherequestofanyunitholder.When
assessingtheliquidityofamoneymarket
instrument,thefollowingcumulativefactors
havetobetakenintoaccount:
PAGE77
At the instrument level:
(i) frequencyoftradesandquotesforthe
instrumentinquestion;
(ii) numberofdealerswillingtopurchase
andselltheinstrument,willingnessofthe
dealerstomakeamarketintheinstrument
inquestion,natureofmarketplacetrades
(timesneededtoselltheinstrument,
methodforsolicitingoffersandmechanics
oftransfer);
(iii)sizeofissuance/program;
(iv)possibilitytorepurchase,redeemorsellthe
moneymarketinstrumentinashortperiod
(e.g.sevenbusinessdays),atlimitedcost,
intermsoflowfeesandbid/offerpricesand
withveryshortsettlementdelay.
At the fund level,thefollowingrelevantfactors
shouldbeconsideredinordertoensurethat
anyindividualmoneymarketinstrumentwould
notaffecttheliquidityoftheUCITSatthefund
level:
(i) unitholderstructureandconcentrationof
unitholdersoftheUCITS;
(ii) purposeoffundingofunitholders;
(iii)qualityofinformationonthefund’scashflow
patterns;
(iv)prospectuses’guidelinesonlimiting
withdrawals.
Thefactthatsomeoftheseconditionsarenot
fulfilleddoesnotautomaticallyimplythatthe
financialinstrumentsshouldbeconsidered
asnon-liquid.Theseelementsmustensure
thatUCITSwillhavesufficientplanninginthe
structuringoftheportfolioandinforeseeing
cashflowsinordertomatchanticipatedcash
flowswiththesellingofappropriatelyliquid
instrumentsintheportfoliotomeetthose
demands.
Thereferencetomoneymarketinstruments
as “instruments which have a value which
can be accurately determined at any time”
shallbeunderstoodasareferencetofinancial
instrumentsforwhichaccurateandreliable
valuationssystems,whichfulfilthefollowing
criteria,areavailable:
(a) theyenabletheUCITStocalculatea
netassetvalueinaccordancewiththevalue
atwhichthefinancialinstrumentheldin
theportfoliocouldbeexchangedbetween
knowledgeablewillingpartiesinanarm’s
lengthtransaction;
(b) theyarebasedeitheronmarketdataoron
valuationmodelsincludingsystemsbased
onamortisedcosts.
Withrespecttothecriterion“value which can
be accurately determined at any time”,ifthe
UCITSconsidersthatanamortisationmethod
canbeusedtoassessthevalueofamoney
marketinstrument,itmustensurethatthiswill
notresultinadiscrepancybetweenthevalue
ofthemoneymarketinstrumentandthevalue
calculatedaccordingtotheamortisationmethod
assetoutinGuidanceNote1/08UCITS:
Valuationofassetsofmoneymarketfunds.
Thecriteriareferredtoaboveregardingliquidity
andavaluationwhichcanbeaccurately
PAGE78
determinedatanytimeshallbepresumedto
befulfilledinthecaseoffinancialinstruments
whicharenormallydealtinonthemoney
marketandwhichareadmittedto,ordealt
inon,aregulatedmarketinaccordance
withsubparagraphs(a),(b)or(c)ofArticle
19,unlessthereisinformationavailable
totheUCITSthatwouldleadtoadifferent
determination.Wherethepresumptionof
“liquidity”and“accuratevaluation”cannotbe
reliedupon,themoneymarketinstrument
shouldbesubjecttoanappropriate
assessmentbytheUCITS.
Thereferenceinsubparagraph(h)ofArticle19
tomoneymarketinstruments,otherthanthose
dealtinonaregulatedmarket,providedthat
theissueortheissuerisitselfregulatedforthe
purposeofprotectinginvestorsandsavings,
shallbeunderstoodasareferencetofinancial
instrumentswhichfulfilthefollowingcriteria:
(a) theyfulfiloneofthecriteriasetoutinabove
regarding“instrumentsnormallydealtinon
themoneymarket”andallthecriteriaset
outaboveregarding“instrumentswhich
areliquid”and“valuewhichcanbe
accuratelydeterminedatanytime”;
(b) appropriateinformationisavailablefor
them,includinginformationwhichallows
anappropriateassessmentofthecredit
risksrelatedtotheinvestmentinsuch
instruments,takingintoaccountregulatory
criteriaapplicabletotransferablesecurities
andmoneymarketinstruments;
(c) theyarefreelytransferable.
Formoneymarketinstrumentscoveredby
sub-paragraphs(h)(ii)and(h)(iv)ofArticle
19orforthosewhichareissuedbyalocalor
regionalauthorityofaMemberStateorbya
publicinternationalbodybutarenotguaranteed
byaMemberStateor,inthecaseofafederal
StatewhichisaMemberState,byoneofthe
membersmakingupthefederation,appropriate
informationasreferredtoinparagraph(b)
aboveshallconsistofthefollowing:
(a) informationonboththeissueorthe
issuanceprogrammeandthelegaland
financialsituationoftheissuerpriortothe
issueofthemoneymarketinstrument;
(b) updatesoftheinformationreferredto
insubparagraph(a)onaregularbasisand
wheneverasignificanteventoccurs–
CESR’sviewisthatregularupdatesshould
normallyoccuronanannualbasis;
(c) theinformationreferredtoinsubparagraph
(a)verifiedbyappropriatelyqualifiedthird
partiesnotsubjecttoinstructionsfromthe
issuer.Suchthirdpartiesshouldspecialise
intheverificationoflegalorfinancial
documentationandbecomposedofpersons
meetingprofessionalstandardsofintegrity;
(d) availableandreliablestatisticsontheissue
ortheissuanceprogramme.
Forthemoneyinstrumentscoveredby
subparagraph(h)(iii)ofArticle19,appropriate
informationasreferredtoinparagraph(b)
aboveshallconsistofthefollowing:
PAGE79
(a) informationontheissueortheissuance
programmeoronthelegalandfinancial
situationoftheissuerpriortotheissueof
themoneymarketinstrument;
(b) updatesoftheinformationreferredto
insubparagraph(a)onaregularbasisand
wheneverasignificanteventoccurs;
(c) availableandreliablestatisticsonthe
issueorissuanceprogrammeorother
dataenablinganappropriateassessment
ofthecreditrisksrelatedtotheinvestment
insuchinstruments.
Forallthemoneymarketinstruments
coveredbysubparagraph(h)(i)ofArticle
19,exceptthosereferredtointhecategory
abovecoveredbysub-paragraphsh(ii)and
(h)(iv)etc.andthoseissuedbytheEuropean
CentralBankorbyacentralbankfroma
MemberState,appropriateinformationas
referredtoinparagraph(b)aboveshallconsist
ofinformationontheissueortheissuance
programmeoronthelegalandfinancial
situationoftheissuerpriortotheissueof
themoneymarketinstrument.
Thereferenceinsubparagraph(h)(iii)ofArticle
19toanestablishmentwhichissubjecttoand
complieswithprudentialrulesconsideredbythe
FinancialRegulatortobeatleastasstringent
asthoselaiddownbyCommunitylawshallbe
understoodasareferencetoanissuerwhich
issubjecttoandcomplieswithprudentialrules
andfulfilsoneofthefollowingcriteria:
(a) itislocatedintheEuropeanEconomicArea;
(b) itislocatedintheOECDcountries
belongingtotheGroupofTen;
(c) ithasatleastinvestmentgraderating;
(d) itcanbedemonstratedonthebasisofan
in-depthanalysisoftheissuerthatthe
prudentialrulesapplicabletothatissuer
areatleastasstringentasthoselaiddown
byCommunitylaw.
Thereferenceinsubparagraph(h)(iv)ofArticle
19tosecuritisationvehiclesshallbeunderstood
asareferencetostructures,whetherin
corporate,trustorcontractualform,setupfor
thepurposeofsecuritisationoperations.
Thereferenceinsubparagraph(h)(iv)ofArticle
19tobankingliquiditylinesshallbeunderstood
asareferencetobankingfacilitiessecuredbya
financialinstitutionwhichitselfcomplieswiththe
subparagraph(h)(iii)ofArticle19.
PAGE80
AppendixB
UCITSInvestmentand BorrowingRestrictions
1 PermittedInvestments
InvestmentsofaUCITSareconfinedto:
1.1
Transferablesecuritiesandmoneymarketinstrumentswhichareeitheradmittedto
officiallistingonastockexchangeinaMemberStateornon-MemberStateorwhichare
dealtonamarketwhichisregulated,operatesregularly,isrecognisedandopentothe
publicinaMemberStateornon-MemberState.
1.2Recentlyissuedtransferablesecuritieswhichwillbeadmittedtoofficiallistingonastock
exchangeorothermarket(asdescribedabove)withinayear.
1.3Moneymarketinstruments,asdefinedintheUCITSNotices,otherthanthosedealtona
regulatedmarket.
1.4 UnitsofUCITS.
1.5 Unitsofnon-UCITSassetoutintheFinancialRegulator’sGuidanceNote2/03.
1.6 DepositswithcreditinstitutionsasprescribedintheUCITSNotices.
1.7 FinancialderivativeinstrumentsasprescribedintheUCITSNotices.
PAGE81
2 InvestmentRestrictions
2.1AUCITSmayinvestnomorethan10%ofnetassetsintransferablesecuritiesand
moneymarketinstrumentsotherthanthosereferredtoinparagraph1.
2.2
AUCITSmayinvestnomorethan10%ofnetassetsinrecentlyissuedtransferable
securitieswhichwillbeadmittedtoofficiallistingonastockexchangeorothermarket
(asdescribedinparagraph1.1)withinayear.Thisrestrictionwillnotapplyinrelation
toinvestmentbytheUCITSincertainUSsecuritiesknownasRule144Asecurities
providedthat:
thesecuritiesareissuedwithanundertakingtoregisterwiththeUSSecurities
andExchangesCommissionwithinoneyearofissue;and
thesecuritiesarenotilliquidsecuritiesi.e.theymayberealisedbytheUCITS
withinsevendaysattheprice,orapproximatelyattheprice,atwhichtheyare
valuedbytheUCITS.
2.3
AUCITSmayinvestnomorethan10%ofnetassetsintransferablesecuritiesor
moneymarketinstrumentsissuedbythesamebodyprovidedthatthetotalvalueof
transferablesecuritiesandmoneymarketinstrumentsheldintheissuingbodiesin
eachofwhichitinvestsmorethan5%islessthan40%.
2.4
Thelimitof10%(in2.3)israisedto35%ifthetransferablesecuritiesormoneymarket
instrumentsareissuedorguaranteedbyaMemberStateoritslocalauthoritiesorby
anon-MemberStateorpublicinternationalbodyofwhichoneormoreMemberStates
aremembers.
2.5Thetransferablesecuritiesandmoneymarketinstrumentsreferredtoin2.4shallnot
betakenintoaccountforthepurposeofapplyingthelimitof40%referredtoin2.3.
PAGE82
2 InvestmentRestrictions
2.6
AUCITSmaynotinvestmorethan20%ofnetassetsindepositsmadewiththesame
creditinstitution.
Depositswithanyonecreditinstitution,otherthan
acreditinstitutionauthorisedintheEEA;
acreditinstitutionauthorisedwithinasignatorystate(otherthananEEAMember State)totheBasleCapitalConvergenceAgreementofJuly1988(Switzerland,
Canada,Japan,UnitedStates);or
acreditinstitutionauthorisedinJersey,Guernsey,theIsleofMan,Australiaor NewZealand
heldasancillaryliquidity,mustnotexceed10%ofnetassets.
Thislimitmayberaisedto20%inthecaseofdepositsmadewith
thetrustee/custodian.
2.7
TheriskexposureofaUCITStoacounterpartytoanOTCderivativemaynotexceed
5%ofnetassets.
Thislimitisraisedto10%inthecaseofacreditinstitutionauthorisedintheEEAor
acreditinstitutionauthorisedwithinasignatorystate(otherthananEEAMember
State)totheBasleCapitalConvergenceAgreementofJuly1988;oracreditinstitution
authorisedinJersey,Guernsey,theIsleofMan,AustraliaorNewZealand.
2.8
Notwithstandingparagraphs2.3,2.6and2.7above,acombinationoftwoormoreof
thefollowingissuedby,ormadeorundertakenwith,thesamebodymaynotexceed
20%ofnetassets:
investmentsintransferablesecuritiesormoneymarketinstruments;
deposits,and/or
riskexposuresarisingfromOTCderivativestransactions.
PAGE83
2 InvestmentRestrictions
2.9Thelimitsreferredtoin2.3,2.4,2.6,2.7and2.8abovemaynotbecombined,sothat
exposuretoasinglebodyshallnotexceed35%ofnetassets.
2.10
Groupcompaniesareregardedasasingleissuerforthepurposesof2.3,2.4,2.6,
2.7and2.8.However,alimitof20%ofnetassetsmaybeappliedtoinvestmentin
transferablesecuritiesandmoneymarketinstrumentswithinthesamegroup.
2.11
AUCITSmayinvestupto100%ofnetassetsindifferenttransferablesecurities
andmoneymarketinstrumentsissuedorguaranteedbyanyMemberState,its
localauthorities,non-MemberStatesorpublicinternationalbodyofwhichoneor
moreMemberStatesaremembers,anygovernmentofanyOECDmembercountry
whichisnotaMemberStatewheresuchsecuritiesareratedinvestmentgrade
byaninternationalratingagency,EuropeanInvestmentBank,EuropeanBankfor
ReconstructionandDevelopment,InternationalFinanceCorporation,International
MonetaryFund,Euratom,TheAsianDevelopmentBank,EuropeanCentralBank,
CouncilofEurope,Eurofima,AfricanDevelopmentBank,InternationalBankfor
ReconstructionandDevelopment(TheWorldBank),TheInterAmericanDevelopment
Bank,EuropeanUnion,FederalNationalMortgageAssociation(FannieMae),Federal
HomeLoanMortgageCorporation(FreddieMac),GovernmentNationalMortgage
Association(GinnieMae),StudentLoanMarketingAssociation(SallieMae),Federal
HomeLoanBank,FederalFarmCreditBank,TennesseeValleyAuthorityprovidedthat
ifmorethan35%oftheassetsofaFundisinvestedinsuchsecurities,theFundmust
holdsecuritiesfromatleastsixdifferentissueswithsecuritiesfromanyoneissuenot
exceeding30%ofthenetassets.
PAGE84
3 InvestmentinCollectiveInvestmentSchemes(“CIS”)
3.1 AUCITSmaynotinvestmorethan20%ofnetassetsinanyoneCIS.
3.2 Investmentinnon-UCITSmaynot,inaggregate,exceed30%ofnetassets.
3.3InvestmentinaCIS,whichcanitselfinvestmorethan10%ofnetassetsinotherCIS,
isnotpermitted.
3.4
WhenaUCITSinvestsintheunitsofotherCISthataremanaged,directlyorby
delegation,bytheUCITSmanagementcompanyorbyanyothercompanywithwhich
theUCITSmanagementcompanyislinkedbycommonmanagementorcontrol,orby
asubstantialdirectorindirectholding,thatmanagementcompanyorothercompany
maynotchargesubscription,conversionorredemptionfeesonaccountoftheUCITS
investmentintheunitsofsuchotherCIS.
3.5
Whereacommission(includingarebatedcommission)isreceivedbytheUCITS’
investmentmanager/investmentadviserbyvirtueofaninvestmentintheunitsof
anotherCIS,thiscommissionmustbepaidintothepropertyoftheUCITS.
4 IndexTrackingUCITS
4.1
AUCITSmayinvestupto20%ofnetassetsinsharesand/ordebtsecuritiesissued
bythesamebodywheretheinvestmentpolicyoftheFundistoreplicateanindex
whichsatisfiesthecriteriasetoutintheUCITSNoticesandisrecognisedbythe
FinancialRegulator.
4.2Thelimitin4.1mayberaisedto35%,andappliedtoasingleissuer,wherethisis
justifiedbyexceptionalmarketconditions.
PAGE85
5 General Provisions
5.1
Aninvestmentcompany,ormanagementcompanyactinginconnectionwithallofthe
CISitmanages,maynotacquireanysharescarryingvotingrightswhichwouldenable
ittoexercisesignificantinfluenceoverthemanagementofanissuingbody.
5.2
AUCITSmayacquirenomorethan:
(i) 10%ofthenon-votingsharesofanysingleissuingbody;
(ii) 10%ofthedebtsecuritiesofanysingleissuingbody;
(iii) 25%oftheunitsofanysingleCIS;
(iv) 10%ofthemoneymarketinstrumentsofanysingleissuingbody.
NOTE:Thelimitslaiddownin(ii),(iii)and(iv)abovemaybedisregardedatthetime
ofacquisitionifatthattimethegrossamountofthedebtsecuritiesorofthemoney
marketinstruments,orthenetamountofthesecuritiesinissuecannotbecalculated.
5.3
5.1and5.2shallnotbeapplicableto:
(i) transferablesecuritiesandmoneymarketinstrumentsissuedorguaranteedby
aMemberStateoritslocalauthorities;
(ii) transferablesecuritiesandmoneymarketinstrumentsissuedorguaranteedby
anon-MemberState;
(iii) transferablesecuritiesandmoneymarketinstrumentsissuedbypublic
internationalbodiesofwhichoneormoreMemberStatesaremembers;
iv) sharesheldbyaUCITSinthecapitalofacompanyincorporatedinanon-
memberStatewhichinvestsitsassetsmainlyinthesecuritiesofissuing
bodieshavingtheirregisteredofficesinthatState,whereunderthelegislation
ofthatStatesuchaholdingrepresentstheonlywayinwhichtheUCITScan
investinthesecuritiesofissuingbodiesofthatState.Thiswaiverisapplicable
PAGE86
5 General Provisions
5.3
onlyifinitsinvestmentpoliciesthecompanyfromthenon-MemberStatecomplies
withthelimitslaiddownin2.3to2.10,3.1,3.2,5.1,5.2,5.4,5.5and5.6,and
providedthatwheretheselimitsareexceeded,paragraphs5.5and5.6below
areobserved.
(v)Sharesheldbyaninvestmentcompanyorinvestmentcompaniesinthecapital
ofsubsidiarycompaniescarryingononlythebusinessofmanagement,advice
ormarketinginthecountrywherethesubsidiaryislocated,inregardtothe
repurchaseofunitsatunit-holders’requestexclusivelyontheirbehalf.
5.4
AUCITSneednotcomplywiththeinvestmentrestrictionshereinwhenexercising
subscriptionrightsattachingtotransferablesecuritiesormoneymarketinstruments
whichformpartoftheirassets.
5.5
TheFinancialRegulatormayallowrecentlyauthorisedUCITStoderogatefromthe
provisionsof2.3to2.11,3.1,3.2,4.1and4.2forsixmonthsfollowingthedateoftheir
authorisation,providedtheyobservetheprincipleofriskspreading.
5.6
IfthelimitslaiddownhereinareexceededforreasonsbeyondthecontrolofaUCITS,
orasaresultoftheexerciseofsubscriptionrights,theUCITSmustadoptasapriority
objectiveforitssalestransactionstheremedyingofthatsituation,takingdueaccount
oftheinterestsofitsshareholders.
5.7
Neitheraninvestmentcompany,noramanagementcompanyoratrusteeactingon
behalfofaunittrustoramanagementcompanyofacommoncontractualfund,may
carryoutuncoveredsalesof:
transferablesecurities;
moneymarketinstruments;
unitsofCIS;or
financialderivativeinstruments.
PAGE87
5 General Provisions
5.8 AUCITSmayholdancillaryliquidassets.
6 FinancialDerivativeInstruments(‘FDIs’)
6.1AUCITS’sglobalexposure(asprescribedintheUCITSNotices)relatingtoFDImust
notexceeditstotalnetassetvalue.
6.2
PositionexposuretotheunderlyingassetsofFDI,includingembeddedFDIin
transferablesecuritiesormoneymarketinstruments,whencombinedwhererelevant
withpositionsresultingfromdirectinvestments,maynotexceedtheinvestmentlimits
setoutintheUCITSNotices.(Thisprovisiondoesnotapplyinthecaseofindexbased
FDIprovidedtheunderlyingindexisonewhichmeetswiththecriteriasetoutinthe
UCITSNotices.)
6.3
AUCITSmayinvestinFDIsdealtinover-the-counter(OTC)providedthat
thecounterpartiestoover-the-countertransactions(OTCs)areinstitutions
subjecttoprudentialsupervisionandbelongingtocategoriesapprovedby
theFinancialRegulator.
6.4InvestmentinFDIsaresubjecttotheconditionsandlimitslaiddownbythe
FinancialRegulator.
7 RestrictionsonBorrowingandLending
(a)AUCITSmayborrowupto10%ofitsNetAssetValueprovidedsuchborrowingisona
temporarybasis.AUCITSmaychargeitsassetsassecurityforsuchborrowings.
PAGE88
7 RestrictionsonBorrowingandLending
(b)
AUCITSmayacquireforeigncurrencybymeansofa“backtoback”loan
agreement.Foreigncurrencyobtainedinthismannerisnotclassifiedasborrowing
forthepurposesoftheborrowingrestrictionssetoutat(a)aboveprovidedthatthe
offsettingdeposit:
(i) isdenominatedinthebasecurrencyoftheUCITS;and
(ii) equalsorexceedsthevalueoftheforeigncurrencyloanoutstanding.
PAGE89
AppendixC
ManagementCompanyAuthorisationOptions
Management Companies authorised under the UCITS III Management Company Directive are able to carryout the following activities:
2.1themanagementofunittrusts/common
fundsandofinvestmentcompanies
(collective portfolio management).
Thisincludes:
Investmentmanagement
Administration
- legalandfundmanagementaccounting
services
- customerenquiries
- valuationandpricing(includingtax
returns)
- regulatorycompliancemonitoring
- maintenanceofunit-holderregister
- distributionofincome
- unitissuesandredemptions
- contractsettlements(includingcertificate
dispatch)
- recordkeeping
Marketing
2.2(a) managementofportfoliosof
investments,includingthoseowned
bypensionfundsinaccordance
withmandatesgivenbyinvestorson
adiscretionaryclient-by-clientbasis
(individual portfolio management),
wheresuchportfoliosincludingone
ormoreoftheinstrumentslistedin
SectionBoftheAnnextothe
InvestmentServicesDirective;
2.3(b) asnon-coreservices:
investmentadviceconcerningone
ormoreoftheinstrumentslistedin
SectionBoftheAnnextothe
InvestmentServicesDirective
safekeepingandadministration
inrelationtounitsofcollective
investmentundertakings
ItisimportanttonotehoweverthatManagement
Companymaynotbeauthorisedsolelyto
providetheservicesreferredtoin2.2(a)or(b)
and,furthermore,mayonlybeauthorisedto
providethenon-coreservicesreferredtoin2.2
(b)wheretheyareauthorisedforactivity2.2(a).
ContactUs
17
PAGE91
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