Sun, Sep 25, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

ESMA rules that UCITS may not invest in unregulated hedge funds

Thursday, November 22, 2012
Opalesque Industry Update - In a further indication of policy orientation at European level that is seeking to limit the instruments that UCITS funds may invest in, on 20 November 2012, the European Securities and Markets Authority ("ESMA") published a formal opinion on its interpretation of Article 50(2)(a) of the UCITS Directive (Directive 2009/65/EC) (the so-called “trash ratio”) which permits UCITS to invest up to 10% of its net assets in transferable securities and money market instruments, other than those eligible assets referred to in Article 50(1).

The Opinion arises from the fact that “questions have emerged about the correct interpretation of this Article and, in particular, whether the derogation…applies to units or shares of collective investment undertakings.”

A number of national regulators, including the Central Bank of Ireland and the CSSF in Luxembourg, have interpreted Article 50(2)(a) as permitting UCITS to invest in unregulated investment funds, including hedge funds, provided the investment complies with the eligibility criteria for UCITS, which is understood as meaning hedge funds that redeem units at the request of unitholders and operate on the principle of risk spreading.

In its Opinion, ESMA states that Article 50(2)(a) refers only to investments in transferable securities and money market instruments and that it does not refer to units or shares of collective investment undertakings.

As a result, ESMA considers that UCITS may only invest in collective investment undertakings that fall within the meaning of Article 50(1)(e), meaning other UCITS, or alternatively, funds that are subject to equivalent supervision as UCITS and which provide an equivalent level of investor protection as UCITS.

In order to comply with the Opinion, UCITS that have investments in hedge funds will be expected to redeem such holdings "taking into account the best interests of investors and at the latest by 31 December 2013". It will be interesting to see whether national regulators look for earlier compliance than the 31 December 2013 deadline.

Following the entering into force of the revised Lamfalussy process, the role of ESMA is to achieve greater consistency in day to day application of EU legislation in the security markets field and it is expected to play an active role in building a common EU supervisory culture and consistent supervisory practice, including by providing opinions to competent authorities and issuing guidelines and recommendations.

Although technically these opinions, guidelines and recommendations are considered to be “soft law” and, therefore, not binding; ESMA’s opinions are a central reference for the work of national regulators. Accordingly, the Opinion should be treated on a comply-or-explain basis by national regulators.

This legal update was published by international law firm Dechert LLP. Corporate website: Source

fg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Star names struggle as smaller hedge funds make hay[more]

    From eFinancialnews.com: Many big-name funds have been hit by sharp reversals in markets, including US government bonds and UK stocks, and have struggled to extricate themselves from positions that have gone bad. According to data group eVestment, hedge funds below $250 million in size are up 4.1% t

  2. North America - Acela fight splits hedge fund Connecticut and old money enclaves[more]

    From Bloomberg.com: Connecticut’s residential coastline is two worlds, the one of newcomer millionaires and one whose wealth and New England roots span generations. Now, their differences over a rail route threaten to gum up plans for the U.S. Northeast’s fastest-ever trains. About 30 miles from Man

  3. Activist News - Caesars offers creditors another $1.6bn, would spell end of hedge fund ownership, Activist investors double chance of CEO exits[more]

    Caesars offers creditors another $1.6bn, would spell end of hedge fund ownership From Calvinayre.com: Casino operator Caesars Entertainment has improved its offer to junior creditors to over $5b, but the offer is only good until Friday. On Wednesday, Caesars added an extra $1.6b to the $

  4. Comment - ‘Gut feeling’ measurable in hedge fund traders, How hedge fund managers can use blockchain to maximize benefits[more]

    ‘Gut feeling’ measurable in hedge fund traders From Laboratoryequipment.com: “Gut feeling” is an intangible – an automatic hunch – based on prior experience for some people. But the “gut feeling” is actually a measurable response developed in professionals doing some high-risk work, acco

  5. Opalesque Exclusive: Modern investor tools (2): A platform that does the job for you[more]

    Benedicte Gravrand, Opalesque Geneva: A new series on technology providers that assist asset allocators. There is disruption in the investor part of the world of hedge funds, coming from platforms that can replace traditionally-run search and analysis. Here is one of them. L