ESMA issues a Q&A regarding its Guidelines on ETFs and other UCITS issues
On 18 December 2012, ESMA published its Guidelines on ETFs and other UCITS issues1 (the “ESMA Guidelines”). The ESMA Guidelines relate to issues surrounding exchange traded funds ("ETFs"), the use of financial indices by UCITS and other general UCITS issues.
On 15 February 2013, the Central Bank of Ireland (the “Central Bank”) released an update to its UCITS Notices and certain UCITS Guidance Notes to align them with the measures contained in the ESMA Guidelines. For more on the updated UCITS Notices and UCITS Guidance Notes please find the link to our paper entitled Update to the Central Bank's UCITS Notices and Guidance Notes here.
On 15 March 2013, ESMA published a Questions and Answers paper relating to the ESMA Guidelines (the "Q&A"). The Q&A provides responses to questions posed by the general public and competent authorities in relation to the practical application of the ESMA Guidelines. The Q&A can be accessed by following this link.
Some of the key points arising from the Q&A are briefly summarised below:
- Further guidance is provided on the timing of publication of index component weightings following a rebalancing: weightings of index components to be published as soon as possible but in all cases before the next rebalancing (example given of a monthly rebalancing index to publish as soon as possible but within one month). (Q&A: 7d.)
- Further guidance is provided on the technical adjustments to indices that will be permissible daily/intra-day and not constitute rebalancing: rebalancing will exclude adjustments based on objective, publicly available criteria. The criteria outlined in the Q&A are set out in full below i.e. technical adjustments are adjustments which:
- are based solely on algorithmic non-subjective frameworks;
- are generally published on an ex-ante basis;
- draw on publicly available criteria (or data); and
- do not rely on the judgement of the index-provider, for example, indices
which follow mechanical rebalancing formulae.
- ESMA confirms that where a swap counterparty has portfolio discretion, even subject to the UCITS agreement, this will be an investment management delegation arrangement (and therefore in an Irish context this counterparty will need to be cleared to act as investment manager to Irish authorised funds). (Q&A: 5d.)
- Clarification is given to the effect that an umbrella range of sub-funds that are all ETFs may, but is not required to, apply the label "UCITS ETF" at the umbrella level. (Q&A: 2.)
- ESMA confirms that secondary market investors redeeming from ETFs directly should be redeemed at net asset value after deduction of costs. (Q&A: 3.)
- ESMA confirms that efficient portfolio management ("EPM") provisions in the ESMA Guidelines do not prevent the payment of fees (as opposed to revenue sharing) to securities lending agents as normal compensation for their services. (Q&A: 4a.)
- It is clarified that the identity of securities lending agents receiving fees from the UCITS and disclosure as to whether they are a related party may be made in the prospectus of the UCITS or its annual report. (Q&A: 4c.)
- ESMA confirms that all assets received to cover counterparty risk in the context of a derivative or EPM technique (even excess collateral) must be deemed collateral and meet the requirements of the ESMA Guidelines. (Q&A: 6a.)
- ESMA confirms that collateral issuer diversification is at aggregate fund level i.e. as a measure of net asset value and not on counterparty to counterparty basis. (Q&A: 6f.)
- Regarding transitional provisions, the new requirements that apply from 18 February to the reinvestment of cash collateral applies only to new reinvestment, i.e. reinvestment post 18 February 2013. (Q&A: 8a.)
- Regarding transitional provisions, the new annual report disclosure requirements for index tracking funds regarding anticipated tracking error for the period and difference between anticipated and actual tracking error do not apply until next reporting periods commencing after 18 February 2013. (Q&A: 8b.)
It is fair to say that the funds industry is still wrestling with many challenges arising from the ESMA Guidelines. In terms of additional assistance the Q&A provides, this is quite limited. In many instances, the Q&A merely confirms the terms of the ESMA Guidelines. However, it should be welcomed that some additional clarity has been provided in the specific cases of (i) the timing of financial index weighting publications; and (ii) what constitutes technical adjustments of financial indices. In addition, it is positive that no attempts are made to extend or increase the requirements of the ESMA Guidelines and the Q&A is not being used as a means of developing an additional layer of regulation.
For further information on the topics covered in this note or to obtain a copy of our paper entitled ESMA Guidelines on ETFs – Initial Impact Assessment for Irish UCITS, please contact any of the individuals listed above.