Investment Funds - CSSF Circular - Clarification of the relationship between the custodian and the prime broker in case of a SIF

In a Circular issued on 5 September 2008, the CSSF clarified the interaction between the prime broker and the custodian of a SIF. In Luxembourg, the prime broker must be a financial institution subject to the control of a supervisory authority of a State with a supervisory regime recognised to be equivalent to that provided by EU legislation. Prime brokers are essential to SIFs that implement a hedge fund strategy or that make use of derivatives. By setting up four guidelines, the Circular should facilitate the use of prime brokers by SIFs.


Those rules are exclusively applicable to specialized investment funds, i.e. funds set up under the 2007 Law on Specialized Investment Funds (the ‘SIF Law’) and hence the provisions of this Circular do not cover funds set up under the 2002 Law.


Acceptance of the prime broker by the custodian

The custodian has to approve the SIF’s choice of prime broker given the fact that the custodian has to arrange its relationship with the SIF and the prime broker so as to be able to fulfil its duty of supervision of assets. The approval by the custodian of the SIF’s choice of prime broker is limited to ensuring that the prime broker fulfils the following criteria:

  • The prime broker is a financial institution regulated by a supervisory authority in a state in which the supervisory regime is recognised as being equivalent to the regime provided ofr by Community law;
  • The prime broker is a financial institution which is recognised and specialized in this type of transactions.

Relationship between the prime broker and the custodian

The custodian has the right to information and a right of intervention concerning the composition of the portfolio of the SIF. It must also have access to the assets that are entrusted to the prime broker. The contractual relationship between the SIF and the prime broker or between the custodian and the prime broker will contain the required procedures to that effect. However, the custodian does not need to have information about the correspondents to which the prime broker has entrusted the SIF's assets.

General administration tasks

In the case of a SIF having the form of a fond commun de placement (commun fund), the prime broker might be contractually required to carry out all operations concerning the day-to-day administration of the SIF's assets.


The sales documents of a SIF using a prime broker must contain an accurate description of the implications of such use and the related risks.

CSSF Risk spreading guidelines for SIFs

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.

Luxembourg parliament adopted a law replacing the 1991 law on UCIs

On 13th February 2007, the Luxembourg parliament adopted a law replacing the 1991 law on UCIs (undertakings of collective investment) dedicated to institutional investors.
The law provides a more flexible framework for specialized investment funds. We set out hereunder the most important changes:

  • no need to be set up by an institutional promoter;
  • the minimum share capital of 1,25 million Euro must only be reached within a period of 12 months following the approval by the CSSF (and not 6 months as prior to the law);
  • enlargement of the scope of investors: not only institutional investors but all sophisticated investors may invest in SIFs. A sophisticated investor includes institutional investor, professional investor and also any private individual who(a) confirms formally that he adheres to the status of sophisticated investor; AND
    (b) (i) invests a minimum of 125,000 Euro or (ii) has obtained a certificate of a credit institution or another professional of the financial sector certifying his experience and his knowledge in appraising the contemplated investments;
  • SIFs can start their activity before the CSSF has granted approval, provided the request for authorization is filed with the CSSF within one month after the SIFs creation;
  • Assets should be valued at fair value but it can be determined in the management regulations or the by-laws of the SIF;
  • No detailed investment restrictions (risk spreading rules);
  • No need to issue a prospectus;
  • No requirement to publish a semi-annual report.

The new law provides a more flexible framework for the establishment of Luxembourg funds and more in particular allows private individuals to invest in funds.