Over-Reliance on Credit Ratings: Important Changes to the UCITS Regulations
The European Union (Alternative Investment Fund Managers) (Amendment) Regulations 2014 (S.I. No. 379 of 2014) (the "Amending Regulations") were published on 12 August 2014. A copy is available here.
The purpose of the Amending Regulations is to transpose the requirements of the Credit Ratings Agencies Directive (2013/14/EU) ("CRAD") into Irish law. CRAD aims to restrict the reliance on ratings provided by credit rating agencies and to clarify the obligations for risk management.
The Amending Regulations make changes to the following principal regulations: (i) the European Union (Alternative Investment Fund Managers) Regulations 2013 (the "AIFM Regulations"); and (ii) the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (the "UCITS Regulations").
This client update focuses on the amendments being made to the UCITS Regulations with respect to the over-reliance by UCITS and UCITS management companies on credit ratings. It should be noted that corresponding changes will be made to the AIFM Regulations. Therefore the new provisions considered below shall apply equally to funds and alternative investment fund managers under the scope of the AIFM Regulations.
Changes to the UCITS Regulations
Once in effect, the Amending Regulations will require that UCITS (or UCITS management companies) shall not solely or mechanistically rely on a credit rating issued by a credit rating agency when monitoring and measuring risk.
The Amending Regulations also provide that the Central Bank of Ireland (the "Central Bank") shall assess the use of references to credit ratings in the investment policies of the UCITS and, where appropriate, encourage mitigation of the impact of such references with a view to reducing sole and mechanistic reliance on such credit ratings.
The Amending Regulations come into effect on 21 December 2014.
The Central Bank has indicated to Maples and Calder that they will not be updating the UCITS Notices to reflect the provisions of the Amending Regulations.
UCITS and UCITS management companies should now consider undertaking a review of both their risk management policies and the investment policies of their funds in light of these new requirements so as to address any instances where it could be perceived that there is sole or mechanistic reliance on credit ratings.
For further information on the matters covered in this update, please contact your usual Maples and Calder contact.