The CSSF published on September 30 Circular 14/592, implementing into Luxembourg’s regulatory framework the revised guidelines issued by the European Securities and Markets Authority on August 1 on ETFs and other UCITS issues for regulators and UCITS management companies. The changes took effect on October 1.
The circular, which supersedes CSSF Circular 13/559, applies to UCITS funds (those subject to Part I of Luxembourg’s investment funds law of December 17, 2010) and to individuals involved in their operation and supervision.
The new guidelines provide for a derogation from the rules that limits the maximum exposure of a basket of collateral to a given issuer to 20% of the UCITS fund’s net asset value.
The requirement for sufficient diversification with regard to issuer concentration is now deemed to be respected if the UCITS receives a basket of collateral whose maximum exposure to a single issuer is 20% of the fund’s NAV from a counterparty with which it is undertaking efficient portfolio management and over-the-counter derivative transactions.
When a UCITS is exposed to different counterparties, the various baskets of collateral must be aggregated to measure compliance with the 20% single issuer limit. However, as a derogation, the fund may be fully collateralised with different securities and money market instruments issued or guaranteed by an EU member state, one or more local authorities, a third country, or a public international body to which at least one member states belong.
In this case the UCITS should receive securities from at least six different issues, and securities of any single issue should not account for more than 30% of its NAV. Funds that intend to be fully collateralised through securities issued or guaranteed by a member state should declare this in its prospectus.
UCITS should also identify the member states, local authorities or international bodies issuing or guaranteeing securities that they can accept as collateral for more than 20% of their NAV.
The introduction of this derogation is coupled with the obligation to provide clear information to investors about the fund’s collateral policy in its prospectus and annual report.