On 3 August 2007, the CSSF (Luxembourg regulator) issued a circular letter 07/309 (the “Circular”) containing guidelines on the principle of risk spreading as laid out in article 1 of the Law of 13th February 2007 on specialized investment funds (the “SIF Law”).
Article 1 of the SIF law provides that:
“For the purpose of this Law, specialized investment funds shall be any undertakings for collective investment situated in Luxembourg: – the exclusive object of which is the collective investment of their funds in assets in order to spread the investment and to ensure for the investors the benefit of the results of the management of their assets….”.
In general the CSSF has upheld a flexible interpretation to the principle of risk spreading with some minor restrictions. The CSSF leaves it up to the investors of the fund to evaluate the principle of risk spreading by gathering themselves all the information they deem necessary. As a general matter, the CSSF considers that the principle of risk spreading is fulfilled if the investment policy of the fund is in accordance with the following guidelines:
- An SIF can in principle not invest more than 30% of its assets in securities of the same type issued by the same issuer. These restrictions are not applicable for:
- Investments in securities issued or guaranteed by a member state of the OECD or by its public collectivities or by a supranational organization with a global or regional character;
- Investments in target UCIs whose risk spreading criteria are at least equivalent with those required for the SIF.
- Uncovered sales can in principle not have as consequence that the SIF holds a covered position on securities of the same type issued by the same issuer which represents more than 30% of its assets;
- When derivative instruments are used, the SIF has to ensure an equivalent risk spreading policy by an appropriate diversification policy of its underlying assets. In over the counter operations, the risk of consideration has to be limited in function of the quality and qualification of the consideration.
These guidelines apply in principle to each SIF. However, the CSSF can provide for derogations based on an appropriate justification.