Update of CSSF FAQ on UCITS Law

On 30 November 2023, the CSSF released its latest update of the FAQ regarding the Law of 17 December 2010 on undertakings for collective investment (the “2010 Law), originally published on 8 December 2015. This 16th version aims to clarify key aspects of UCITS from a Luxembourg perspective, addressing management companies and UCITS established in Luxembourg.

The updated FAQ delves into the “ancillary liquid assets” concept, assets that UCITS are permitted to hold under Article 41(2)b) of the 2010 Law. Notably, it includes updates to Questions 1.14 and 1.15.

The FAQ outlines that ancillary liquid assets for UCITS should be limited to bank deposits at sight, such as cash held in current accounts that are accessible at any time. These assets are meant to cover current or exceptional payments, or for the time necessary to reinvest in eligible assets under Article 41(1) of the 2010 Law, or for a period strictly necessary during unfavorable market conditions.

The FAQ reiterates the 20% limit of a UCITS net assets for holding ancillary liquid assets. However, this limit may be temporarily breached for a strictly necessary period when, due to exceptionally unfavorable market conditions, circumstances require it, and where such breach is justified in the interests of investors (e.g., in extremely serious circumstances such as the September 11 attacks or the collapse of Lehman Brothers in 2008).

Furthermore, regarding feeder UCITS as per Article 77(2)(a) of the 2010 Law, it is specified that ancillary liquid assets can include highly liquid assets such as deposits at credit institutions, money market instruments, and money market funds. In this context, feeder UCITS are allowed to allocate 15% of their total assets to such ancillary liquid assets.

Finally, the FAQs clarify that bank deposits, money market instruments, and money market funds, unless they meet the criteria of Article 41(1), cannot be considered ancillary liquid assets under Article 41(2)(b) of the 2010 Law.

For a comprehensive understanding of these updates, you can explore the detailed FAQ on the CSSF website: FAQ Law 17 December 2010 (cssf.lu)

Feel free to reach out to our investment management team if you have any questions.

CSSF Standardised Model Prospectus for UCITS

The CSSF issued on 17 November 2022 a communication on the launch of a standardised prospectus template for UCITS (the “Standardised Model Prospectus“), to be used when applying for authorisation of a new UCITS.

The aim of the Standardised Model Prospectus is to facilitate the drafting of the fund’s issuing document for a proposed UCITS launch and enable the CSSF to carry out an easier examination of the application for authorisation.

The use of the Standardised Model Prospectus is intended for the constitution of any UCI which cumulatively meets the following four conditions:

  • a UCITS subject to Part I of the law of 17 December 2010 concerning undertakings for collective investment;
  • a UCITS to be constituted in the form of an investment company with variable capital (SICAV);
  • a UCITS to be managed by a management company domiciled in Luxembourg or by a management company domiciled in another EU Member State in accordance with the freedom to provide services on a cross-border basis; and
  • an umbrella UCITS of low to medium complexity.

The Standardised Prospectus Model should not be considered a regulatory requirement nor a guarantee for approval. Indeed, the Standardised Model Prospectus is intended to serve as guidance and good practice to reduce the overall processing time. Therefore, the approval process (i.e. the submission of the application, the exchange of comments and the approval decision) will not differ.

This document is made available with information of a general nature. It may need to be customised to fit the context, circumstances and specificities of a fund and/or sub-fund project.

Please feel free to contact our investment management team concerning the writing of the issuing document for your future UCITS.


CSSF clarifications on the holding of ancillary liquid assets by UCITS

Further to its press release on 3 November 2021, the Luxembourg Regulator (Commission de Surveillance du Secteur Financier, CSSF) published an updated version of its Frequently Asked Questions (the FAQ)  concerning the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the 2010 Law) whereby it provides the following clarification regarding the holding of ancillary liquid assets by UCITS foreseen under article 41 (2) b) of the 2010 Law:

  • Ancillary liquid assets should be limited to bank deposits at sight, such as cash held in current accounts with a bank accessible at any time, in order to cover current or exceptional payments, or for the time necessary to reinvest in eligible assets provided under article 41(1) of the 2010 Law or for a period of time strictly necessary in case of unfavourable market conditions.
  • The 20% limit in deposits made with a same body under article 43(1) of the 2010 Law applies to ancillary liquid assets, as ancillary liquid assets are limited to deposits at sight with banks.
  • The holding of such ancillary liquid assets is limited to 20% of the net assets of a UCITS. The 20% limit shall only be temporarily breached for a period of time strictly necessary when, because of exceptionally unfavourable market conditions, circumstances so require and where such breach is justified having regard to the interests of the investors.
  • Bank deposits, money market instruments or money market funds should not be included in the ancillary liquid assets under article 41(2) b) of the 2010 Law. Additionally, a UCITS cannot invest in bank deposits, money market instruments or money market funds if it is not indicated in its investment policy and it should specify the purposes, i.e. for investment purpose, cash management or in case of unfavourable market conditions.
  • Margin accounts do not qualify as bank deposits nor as ancillary liquid assets. Initial and variation margins relating to financial derivatives shall be considered as collateral received or posted. Regarding margin accounts, the CSSF considers that the 20% limit in deposits made with a same body under article 43(1) of the 2010 Law does not apply. However, in order to avoid undue exposure to a single body, margin accounts shall be taken into consideration in the 20% global limit applicable to an issuer under article 43(2) of the 2010 Law.

The CSSF expects UCITS to comply with the above-mentioned conditions as described in the FAQ as soon as possible and by 31 December 2022 at the latest, considering the best interests of investors.

You may access the FAQ here.

For more information, please get in touch with our investment management team.

CSSF updates FAQ on UCITS legislation regarding performance fees and other fees

Luxembourg’s Financial Sector Supervisory Authority (CSSF) has published on March 10, 2020 the eighth update of its Frequently-Asked Questions document on the legislation of December 17, 2010 on undertakings for collective investment. The changes deal with disclosure of performance, investment managers and investment advisors fees to investors in a UCITS fund.

Clarifying how a UCITS should disclose performance fees to the investors and to whom performance fees are payable, the CSSF says performance or performance-related fees are designed to motivate the investment manager to outperform a benchmark or achieve some other performance target. The investment manager, it says, is responsible and accountable for the investments of the fund and its performance.

Both the fee model and the identity of the investment manager as the recipient of a performance fee must be disclosed in the fund’s prospectus. If there is an arrangement for sharing of the performance fee with one or more investment advisors in a contractual relationship with the fund, this information should also be disclosed in the prospectus.

Disclosure of investment managers and investment advisors fees

Regarding how a UCITS should specify and disclose the investment manager’s and investment advisor’s fees in comparison with other fees paid out of the funds’ assets, the CSSF notes that according to point 6 of Schedule A of Annex I of the 2010 legislation, expenses or fees should be disclosed in the prospectus.

This disclosure should distinguish between fees to be paid by the fund’s shareholders or unit-holders, and those to be paid from the fund’s assets. Where service fees are directly paid out of the assets to the investment manager and to any investment advisor, the method of calculation or the rate of the fee to each recipient must be disclosed in the prospectus.

The CSSF says that for the sake of transparency and to enable investors to make an informed judgement about the proposed investment, as required under Article 151 (1) of the legislation, the investment manager’s and/or investment advisor’s fees should only pay for investment management or investment advice. In general, the investment advisor’s fee would be expected to be lower than that of the investment manager.

Disclosure of other expenses or fees

Any other expenses or fees for activities outside the direct scope of investment management or advice are payable out of the fund’s assets to the investment manager or investment advisor, they should be disclosed separately from the investment manager’s and investment advisor’s fees, and should clearly inform investors about the nature of the expenses or fees.

In cases where an all-in fee is proposed, under which a single compensation amount is paid out of the fund’s assets to a recipient (usually the management company) that will afterwards pay the other service providers, the prospectus must clearly detail the scope and nature of the all-in fee, and ideally, each contractual recipient from the fee should be specified.

The CSSF says this provides clarity to investors regarding compensation, fees and expenses that makes comparison between different UCITS possible and facilitates the investor in making their choice.

Amendments of Level 2 Regulations regarding safekeeping obligations for alternative investment funds (AIF) and UCITS depositaries

Commission delegated regulations (EU) 2018/1618 and (EU) 2018/1619, both of July 12, 2018 and regarding the safe keeping duties of depositaries, were published in the European Official Journal on October 30, 2018. The measures amend previous delegated regulations from 2013 and 2016 respectively.

The revised regulations impose stricter rules on depositaries delegating their safekeeping obligation applicable from April 1, 2020, giving institutions a grace period of 18 months to adapt their arrangements with third-party providers to which they have delegated their obligations.

Depositaries must review all delegation arrangements and negotiate amendments that ensure they can fulfil their oversight and due diligence obligations. The written agreement should notably enable the depositary to identify all entities within the custody chain.

They should also be able to verify that the quantity of identified financial instruments recorded in the financial instruments accounts opened in the depositary’s books in the name of the UCITS or alternative investment fund or in the name of the management company acting on the fund’s behalf matches the quantity held in custody by the third party for that fund as recorded in the financial instruments account in its books.

Depositaries must also verify that the quantity of identified financial instruments registered and held in a financial instruments account at the issuer’s Central Securities Depository or its agent, in the name of the third party on behalf of its clients, matches the quantity in the financial instruments accounts in the depositary’s books in the name of each of its fund clients or that of the management company.

The same requirements will apply between the third-party and any other contracted providers in the case of a further delegation of custody functions. The agreement between the depositary and the third party delegate must indicate whether sub-delegation is permitted and if so, under what conditions.

The delegated regulations clarify the frequency of reconciliations between the financial securities accounts and the records of the depositary of a UCITS or alternative fund client and the third party, or between the third parties, where the custody function has been delegated further down the custody chain.

Depositaries must also ensure and verify that the third party delegate complies with the segregation requirements laid down in point (iii) of Article 21(11)(d) of the Alternative Investment Fund Managers Directive (2011/61/EU).

Where the third party is located in a non-EU country, the depositary must obtain independent legal advice confirming that the applicable insolvency law recognises the segregation of the assets of the depositary’s clients from the assets of the third party to which custody functions have been delegated in accordance with Article 21(11) of the AIFMD, the assets of the third party’s other clients and those held by the third party for the depositary’s own account; that the assets of the depositary’s fund clients do not form part of the third party’s estate in the event of insolvency; and that the assets of the fund clients are not available to the third-party’s creditors or realised for their benefit.

Managers of alternative and UCITS funds will be required to check whether amendments to their existing depositary agreements will be necessary.

The full text of the delegated regulations are available in English at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R1618&from=EN and at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R1619&from=EN for (EU) 2018/1619.

CSSF issues circular on governance and organisation of non-UCITS fund depositaries

Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier, published on August 23 CSSF Circular 18/697 on organisational requirements applicable to depositaries of funds that are not subject to the UCITS rules set out in Part I of the investment fund legislation of December 17, 2010 and to their branches.

The circular amends Circular CSSF 16/644 regarding the provisions applicable to banks acting as UCITS depositaries under Part I of the 2010 legislation or their management companies, as well as Circular IML 91/75 (in turn amended by Circular CSSF 05/177) regarding the revision and remodelling of the rules governing Luxembourg funds under the law of March 30, 1988.

The new circular, which will come into force on January 1, 2019, is applicable to all non-UCITS Luxembourg depositaries, as well as EU banks and investment firms or their branches that are currently providing depositary services in Luxembourg, or intend to apply for an authorisation to do so in the future, to three categories of non-retail funds.

These comprise alternative investment funds managed by an authorised management company or alternative investment fund manager; Luxembourg Part II funds managed by a fully authorised or registered AIFM that stipulate in their constitutive documents that they are not distributed to retail investors established in Luxembourg; and specialised investment funds (SIFs) and risk capital investment vehicles (SICARs) that do not qualify as AIFs or that do so and are managed by a registered AIFM.

Most of the rules set out in the circular supplement the AIFMD transposition legislation of July 12, 2013 and the Commission’s level 2 delegated regulation (EU) 231/2013 regarding depositaries, clarifying the organisational requirements of the categories of depositary covered.

These include the eligibility criteria for AIF depositaries, segregation rules, depositary rights of pledges, and the rules to be followed when providing services to funds that invest in assets including real estate, private equity, tangible assets and financial derivatives.

The circular also requires the alternative fund to ensure that on its appointment and on an ongoing basis the depositary has access without undue delay to all the relevant information it needs to comply with its obligations regarding depositary services for the AIF in question.

If the AIFM is not established in Luxembourg, the depositary must conclude a written agreement with it setting out the flow of information necessary for it to perform its functions, notably regarding the safekeeping of assets, monitoring of the fund, and the legislative, regulatory and administrative provisions applicable to the depositary. The parties to the contract appointing the depositary may agree that all or part of the information required may be transmitted electronically.

The full text of the circular (in French) is available at http://www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf18_697.pdf

CSSF sets out more restrictive policy on UCITS investment in non-UCITS funds

Luxembourg’s Financial Sector Supervisory Authority (CSSF) has announced changes to its policy regarding investment by UCITS funds in non-UCITS undertakings for collective investment, amending the guidance contained in its Frequently Asked Questions document addressing the law of December 17, 2010 on undertakings for collective investment.

In the interests of convergence at EU level regarding the UCITS regime, the CSSF now says that UCITS may no longer invest in other UCIs and those that have done so are required to divest their holdings as soon as possible, unless the eligibility of each target fund has been confirmed specifically through case-by-case analysis.

Point 1.4 of the FAQs previously stated that non-UCITS ETFs were eligible investments for UCITS funds if they effectively complied with all criteria of Articles 2(2) and 41(1)(e) of the 2010 legislation, event if the offering documents of non-UCITS ETFs contain provisions regarding investment that are not equivalent to the requirements applicable to UCITS.

However, the CSSF says that given the specific characteristics of each non-UCITS ETF, merely the existence of a system of compliance control, or written confirmation from the ETF or the manager of the fund’s eligibility, is no longer acceptable.

The regulator says that for a non-UCITS ETF to be accepted for investment by a UCITS, an eligibility analysis must be carried out in each case, and the UCITS must continuously monitor that the investment rules applied by the ETF are equivalent to those applicable to UCITS.

The CSSF emphasises that to be eligible under article 50(1)(e) of the UCITS directive, non-UCITS funds must be prohibited from investing in illiquid assets such as commodities and real estate, in conformity with Article 1(2)(a) of the UCITS directive.

They must also be bound by rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments that are equivalent to the requirements under article 50(1)(e)(ii) of the UCITS directive. Simple compliance in practice is no longer considered sufficient.

The non-UCITS fund’s rules or instrument of incorporation must also include a provision stipulating that no more than 10% of its assets in aggregate can be invested in UCITS or other UCIs in compliance with article 50(1)(e)(iv) of the UCITS directive. Again, mere compliance in practice is not sufficient.

As a result, UCITS funds subject to the 2010 legislation that have invested in non-UCITS on the basis of the policy previously set out in Point 1.4 of the FAQs must disinvest from these funds as soon as possible, subject to the best interests of the investors. The CSSF says it will contact fund managers that have invested in such UCIs to check compliance with the new policy by March 31, 2018. In addition, new investments in such funds is no longer allowed unless the new requirements are fulfilled.

The version of the CSSF’s Frequently Asked Questions regarding Luxembourg’s legislation of December 17, 2010 relating to undertakings for collective investment, updated on January 5, 2018, may be viewed at http://www.cssf.lu/fileadmin/files/Metier_OPC/FAQ/FAQ_Law_17_December_2010_050118.pdf

ESMA sets out new rules for UCITS share classes

On January 30, 2017 the European Securities and Markets Authority issued an opinion on the minimum principles that management companies must apply when establishing different UCITS share classes. The opinion is aimed at ensuring a harmonised approach throughout the EU, where different national approaches have been observed up to now.

The opinion is addressed to national regulators including Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF), which has already endorsed it in a press release on February 13. The CSSF expects Luxembourg-domiciled UCITS management companies to take any necessary measures to comply with the transitional provisions set out in the opinion, and any new UCITS share classes created will have to comply with the principles.

ESMA says share classes that are not compliant with the principles may continue to exist, but should close to investment from new investors within six months of the opinion’s publication, that is, by July 30, 2017, and to additional investment from existing investors within 18 months of publication, by July 30, 2018.

ESMA sets out four principles regarding the establishment of UCITS share classes:

1. Common investment objective

Multiple share classes of the same UCITS should have a common investment objective reflected by a common pool of assets. ESMA considers that hedging arrangements at share class level, apart from currency risk hedging, are not compatible with the requirement for a UCITS to have a common investment objective. Therefore strategies that seek to protect investors from certain types of risk should be set up as separate UCITS or sub-funds. The authority says this is because the use of derivative overlays for a particular share class could result in that share class having an individual risk profile and therefore an investment objective that is no longer in line with the objective of the UCITS or sub-fund.

2. Non-contagion

UCITS management companies should implement procedures to minimise the risk that features specific to a single share class could have a potentially adverse impact on other share classes of the same UCITS or sub-fund. The risk of contagion or spill-over is particularly high where the UCITS concludes derivative contracts. In such cases these risks should be mitigated and monitored, and borne only by investors in the particular share class. Any administrative costs arising from the need for additional risk management should be borne only by investors in that share class.

3. Pre-determination

All features of a particular share class should be pre-determined before the UCITS is established, including currency risk hedging.

4. Transparency

Where there is a choice between two or more share classes, differences between them should be disclosed to investors through the UCITS prospectus. The management company should have an updated list of share classes readily available and implement appropriate stress tests.

The full text of the opinion may be accessed here.
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ESMA publishes revised Q&A document on UCITS KIID

The European Securities and Markets Authority has issued on March 26 a new version of its Questions and Answers document containing guidance and interpretation of the rules governing the Key Investor Information Document for UCITS funds, designed to promote common supervisory approaches and practices in the practical application of the UCITS regime through responses to questions posed by the general public and regulators themselves.

ESMA says the answers are also intended to help UCITS management companies by providing clarity as to the content of the rules rather than creating an extra layer of requirements. It will review the questions and answers to determine whether in certain areas there is a need to convert some of the material into formal guidelines and recommendations. The document will be regularly edited and updated whenever new questions are received.

The document, which was last updated in September 2012, covers the preparation of KIIDs by UCITS that are no longer marketed to the public or are in liquidation, communication of KIID to investors, the treatment of UCITS with share or unit classes, past performance issues, clarity of language, and identification of the UCITS fund.

The new content deals with past performance. It notes that Article 19(4) of the European Commission’s Level 2 regulation 583/2010 states that in the case of mergers under the UCITS IV provisions, only the past performance of the fund into which the other is merged should be referred to in the KIID. But how should this be interpreted in cases where the continuing fund is one newly established with no performance history, and it is the fund that has been absorbed that in effect ins being continued in the merged entity.

In these circumstances, ESMA says, the KIID should report on the past performance of the UCITS that has been absorbed into the merged entity, as long as the regulator can reasonably determine that the merger has no material impact on the fund’s performance. Such an impact would arise, according to the authority, were there to be a change to the fund’s investment policy or to the entities involved in investment management. The fact that the historic performance described is that of the UCITS that has been absorbed, not the surviving legal entity, must be made clear in the KIID.

ESMA’s updated Q&A document on the Key Investor Information Document for UCITS can be consulted at http://www.esma.europa.eu/system/files/2015-631_ucits_kiid_march_update.pdf.

Luxembourg funds gain access to Shanghai-Hong Kong exchange link

Luxembourg-domiciled UCITS funds are now able to take advantage of the Shanghai-Hong Kong Stock Connect scheme, which allows investors to trade Chinese A-share stocks through the Hong Kong exchange, and vice versa. The first Luxembourg fund received authorisation from the CSSF to use the trading link in December 2014.
Although UCITS domiciled in Luxembourg and elsewhere already had opportunities to invest in Chinese equities, notably through the renminbi qualified foreign institutional investor scheme, the volume of investment is limited by quotas, which has restricted purchases by some fund managers.
According to ALFI director general Camille Thommes, the Stock Connect programme – launched on November 17 last year – represents one of the biggest developments for foreign investors wishing to access the Chinese market.
ALFI says that in order to use the scheme, the Luxembourg UCITS, its management company (if applicable) and the fund’s depositary bank must first ensure that certain conditions are in place. These include:
• Accounts opened by the depositary with a sub-custodian in Hong Kong must be segregated at the level of the UCITS’ sub-funds or structured as UCITS client assets omnibus accounts of the Luxembourg depositary with the sub-custodian.
• The Delivery Versus Payment settlement model must be chosen to limit counterparty risk.
• The fund’s prospectus and KIID, must explicitly inform investors of the specific legal risks relating to the compulsory requirements of the respective markets’ central securities depositaries, Hong Kong Securities Clearing Company and ChinaClear, for custody of securities on a cross-border basis.
Hong Kong Exchanges and Clearing says that some investors were initially concerned about beneficial ownership in A-shares through the nominee structure established under Stock Connect, fearing that they would not have proprietary rights in the A-shares held through the exchange’s subsidiary HKSCC as nominee.
However, HKEx says investors now have confidence that they do have beneficial ownership under both Hong Kong and mainland China law, meaning they would retain their proprietary rights even if HKSCC were to become insolvent. Investors enjoy beneficial ownership rights such as receiving dividends and voting through HKSCC as nominee holder.
Luxembourg UCITS whose investment policy already authorised exposure to A-shares and that need only adapt their prospectus and KIID to cover access to the market through the Stock Connect scheme benefit from a fast-track procedure when filing applications with the CSSF.