Collateral Diversification Requirements
In December 2012 the European Securities and Markets Authority (“ESMA”) published its guidelines on exchange-traded funds and other UCITS issues (the “Guidelines”). The Guidelines include specific requirements on collateral diversification in the context of derivative and efficient portfolio management (“EPM”) transactions. In particular, they provide that collateral should be sufficiently diversified in terms of country, markets and issuers. The issuer concentration requirement is considered to be respected if the UCITS receives from a counterparty a basket of collateral with a maximum exposure to a given issuer of 20% of the UCITS’ NAV. When UCITS are exposed to different counterparties, the different baskets of collateral should be aggregated to calculate the 20% limit of exposure to a single issuer.
Since the entry into force of the Guidelines on 18 February 2013, ESMA has been asked to reconsider its position on this requirement on the basis that it has a significant adverse impact on UCITS’ collateral management policies, particularly for money market funds that place cash into reverse repurchase agreements.
On 20 December 2013, ESMA issued a consultation paper which proposes an amendment to the Guidelines which would revise the collateral diversification rules for UCITS that take the form of money market funds. ESMA proposes that, by way of derogation from the 20% diversification requirement set out above, a UCITS money market fund may receive collateral of up to 100% of its NAV in different transferable securities and money market instruments issued or guaranteed by an EU member state, one or more of its local authorities, a non-EU country, or a public international body to which one or more EU member states belong. Such a UCITS should receive securities from at least six different issues, but securities from any single issue should not account for more than 30% of the collateral received. As part of its review ESMA considered applying the above derogation to all funds but decided to limit the derogation to money market funds.
In light of the ESMA consultation, the Central Bank has now stated that it will permit a UCITS money market fund, authorised before 18 February 2013, to delay its compliance with the issuer diversification requirement in the Guidelines until such time as ESMA has concluded the consultation process.
Annual Reports Disclosure Requirements
In accordance with the Guidelines, the Central Bank’s UCITS Notices require the annual reports of UCITS to include disclosure of “the revenues arising from efficient portfolio management techniques for the entire reporting period together with the direct and indirect operational costs and the fees incurred.”
The Central Bank considers it to be a reasonable interpretation of the reference to “revenue”, subject to any clarification by ESMA, that it is applicable only to revenue from securities lending and repurchase/reverse repurchase arrangements. Accordingly, this disclosure requirement would not apply to other forms of EPM, such as derivatives used for currency hedging purposes.
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