1 investment management undertakings for collective investment in transferable securities (UCITS)
3 investment management undertakings for collective investment in transferable securities (UCITS)
4 Table of contents Introduction 5 I. Key features 6 II. Available structures 7 III. Umbrella funds/share classes 8 IV. UCITS ETFs 9 V. Substance requirements Designation of a management company Self-managed SICAV/SICAF 12 VI. Service providers Luxembourg-based service providers Other service providers (not necessarily based in Luxembourg) Conditions for authorisation to delegate activities 14 VII. Eligible assets Overview Eligibility Investment restrictions 18 VIII. Efficient portfolio management techniques 22 IX. Collateral management 25 X. Risk management Governance and organisation of the permanent risk management function Risk profile determination Global exposure Liquidity risk Counterparty risk Concentration risk and monitoring of cover rules Risk disclosure/leverage Risk Management Process 30
5 XI. Key Investor Information Document Definition Legal and regulatory provisions Features and Content 31 XII. UCITS Marketing Luxembourg UCITS marketing their units in another Member State UCITS established in another Member State marketing their units in Luxembourg 34 XIII. Master-feeder structures 36 XIV. National and cross-border mergers 37 XV. Regulatory supervision 38 XVI. Taxation 40 XVII. Once-off and ongoing costs at a glance 41 Definitions 42 Arendt & Medernach UCITS team 47 About Arendt & Medernach 48 A broad range of practice areas 49
7 Introduction Luxembourg investment funds may be set up either under the law of 13 February 2007 on specialised investment funds ( SIFs ) or the law of 17 December 2010 on undertakings for collective investment, which is divided into two parts (the 2010 Law ). The present document focuses on Luxembourg UCITS, which fall under the regime of Part I of the 2010 Law (the UCITS regime ). Part II of the 2010 Law applies to non-ucits. The evolution of the UCITS legislation at EU level from UCITS I to UCITS IV may be summarised as follows: UCITS I December 1985 UCITS III January 2002 UCITS IV June 2009 The objective was to create an integrated EU market for investment funds with the following features: - Harmonised investor protection rules through product regulation; - Simplified notification process allowing the marketing of UCITS in Member States. UCITS I stands for the birth of the UCITS passport (see below) and the creation of a UCITS brand. As a result of the industry call for enlargement of eligible investments available to UCITS and the need to enlarge the scope of activities of UCITS management companies, UCITS III created the following achievements: - On the management side, the scope of activities of UCITS management companies was enlarged to encompass individual portfolio management, safekeeping of fund units and investment advice on an ancillary basis; - On the product side, the scope of investment opportunities of UCITS was enlarged by extending the range of eligible instruments. The objective was to gain efficiency by implementing six principal amendments to the UCITS regime: - Implementation of a management company passport; - Creation of a framework for cross-border UCITS mergers; - Creation of master-feeder UCITS structures; - Introduction of a key investor information document; - Introduction of a simplified notification procedure; - Implementation of an enhanced supervisory cooperation. The demand for UCITS comes from both retail and institutional investors. The attractiveness of Luxembourg as a business place for UCITS is evidenced by the EFAMA and ICI statistics showing that as of September 2012, Luxembourg is ranked first in Europe with 31.4% of the total of nets assets of UCITS managed in Europe and this represents 9.6% of the UCITS managed worldwide. According to the CSSF statistics as of 31 January 2013, the number of Luxembourg UCITS amounted to 1803 so that UCITS represented about 47% of the number of undertakings for collective investments and 80% of the assets under management of undertakings for collective investments. Overall, as of 31 January 2013, Luxembourg UCITS managed 1.936,513 billion Euros. The present brochure outlines the main characteristics of UCITS and the requirements imposed by the CSSF for both the setting-up and the corporate life of UCITS. 5
8 I. Key features Criteria to be cumulatively met in order to be subject to the 2010 Law and more specifically to Part I of the 2010 Law Scope of the 2010 Law The savings must be invested on a collective basis; The savings used for collective investment must have been collected from the public; The investments which form the object of the collective investment must be made in accordance with the principle of riskspreading. Scope of Part I of the 2010 Law The assets are invested in transferable securities and other liquid financial assets; The shares/units are promoted to the public in the EU and the EEA; The redemption of shares/units is effected at the request of the investors; The UCITS is not excluded from the coordinated UCITS status by reason of its investment or borrowing policy. Sponsorship For several years, the CSSF required that any UCITS must be promoted by a reputable institution who commits its name and reputation to the proper functioning of the UCITS to be created. The CSSF now considers that the concept of promoter is no longer necessary for UCITS having taken the form of a SIAG or having designated a management company where these meet the requirements of Circular 12/546 (CSSF Press Release 12/45). Accordingly, any new UCITS whose date of authorisation fails between the publication date of the Circular 12/546 (i.e. 24 October 2012) and 1 July 2013 must either designate a management company subject to Chapter 15 of the 2010 Law which meets the requirements of the Circular 12/546, or have a promoter. After this transitory period, the concept of promoter will not exist anymore except for UCI subject to Part II of the 2010 Law. According the Circular 12/546, the CSSF may from now on request a letter of intent by which the issuer of the letter undertakes, vis-à-vis the CSSF, that the sponsored entity complies/will comply with prudential requirements imposed by the applicable law, particularly regarding the requirements relating to own funds. The letter may be requested: - At the time of authorisation of the management company or self-managed SICAV, - At the time of a change of the shareholding, and - When during the lifetime of the management company or self-managed SICAV, the financial soundness of the existing shareholder(s) is not ensured anymore. 6
9 II. Available structures The 2010 Law permits the creation of UCITS in the form of FCPs or of investment companies. The latter may either be established as SICAVs or as SICAFs 1. FCP SICAV SICAF Legal form of vehicle Contractual vehicle. Corporate vehicle. Corporate vehicle. Key features Undivided co-ownership of assets; Variable share capital equal to the net assets; Fixed share capital; Has no legal personality; Has a legal personality; Has a legal personality; Very flexible vehicle, because it is not subject to any specific corporate law requirements. No need to formally increase or reduce the share capital. Formal decision to increase or reduce the share capital is necessary and is subject to specific corporate law requirements. Management Managed by a management company subject to Chapter 15 of the 2010 Law. Managed by a board of directors or a management board/ supervisory board. Depending on legal form, managed by a board of directors, a management board/ supervisory board, or general partner(s). Designation of a management company possible. (see Chapter V) Designation of a management company possible. (see Chapter V) Shareholders/ unitholders Several unitholders; Liability of unitholders limited to the amount committed to the FCP; Several shareholders; Liability of shareholders limited to the amount committed to the SICAV; Several shareholders; Liability of shareholders in principle limited to the amount committed to the SICAF; Possibility to be protected from hostile takeovers, since investors usually do not have voting rights; No voting rights for unitholders except if otherwise provided in the prospectus and the management regulations. Shareholders are entitled to voting rights. Shareholders are entitled to voting rights. Available company forms N/A. Public limited company (société anonyme, S.A.). Public limited company (société anonyme, S.A.); Corporate partnership limited by shares (société en commandite par actions, S.C.A.). 7 1 In practice, UCITS are not set up in the form of SICAFs.
10 III. Umbrella funds/ share classes The 2010 Law permits the creation of UCITS as stand-alone funds or as umbrella funds with different subfunds where each sub-fund corresponds to a distinct portfolio of assets and liabilities of the UCITS. Applicable provisions Objective One single entity Ring fencing Conversion Possibility for a sub-fund to invest in another sub-fund Article 181 of the 2010 Law (constitutional documents must provide for the possibility). Chapter J of Circular 91/75 sets out the conditions for FCPs and investment companies in the form of umbrella funds. May accommodate various needs, such as: - Different investment policies; - Different reference currencies; - Different categories of investors; - Different distribution channels. A UCITS may not comprise simultaneously sub-funds governed by Part I and Part II of the 2010 Law (in such case, the entire umbrella fund would be subject to Part II of the 2010 Law). Each sub-fund is only responsible for its own debts, commitments and other obligations, unless its constitutional documents provide otherwise. In principle, possibility to convert from one sub-fund to another. Under the 2010 Law, a sub-fund may invest in another sub-fund of the same UCITS provided that: - The target sub-fund does not, in turn, invest in the sub-fund invested in this target sub-fund; and - No more than 10% of the assets of the target sub-funds whose acquisition is contemplated may, pursuant to their management regulations or their articles of incorporation, be invested in aggregate in units of other target sub-funds of the same UCI; and - Voting rights, if any, attaching to the relevant securities are suspended for as long as they are held by the sub-fund concerned and without prejudice to the appropriate processing in the accounts and the periodic reports; and - In any event, for as long as these securities are held by the UCI, their value will not be taken into consideration for the calculation of the net assets of the UCI for the purposes of verifying the minimum threshold of the net assets imposed by this Law; and - There is no duplication of management/subscription or repurchase fees between those at the level of the sub-fund of the UCI having invested in the target sub-fund, and the target sub-fund. One or more classes of shares/units that match various characteristics may be created in the stand-alone UCITS or in each sub-fund of the umbrella fund. The classes of shares/units may e.g. have the following distinguishing features: 8 Distribution policy (distribution or capitalisation shares/units); Currency (different currencies for the shares/units may be accommodated, e.g. USD, EUR, JPY, etc); Investors targeted (either retail, professional or institutional investors, investors of a different nationality, etc); Structure of fees (different fee structures may be accommodated, such as e.g. in relation to the subscription fee, redemption fee, conversion fee, deferred sales charge, distribution fee, management fee, performance fee, etc.); Currency hedging (hedged classes or not); Minimum subscription and holding requirements; Etc.
11 IV. UCITS ETFs ESMA Guidelines 2012/832 impose a number of new requirements on UCITS ETFs, which are defined as any UCITS at least one unit or share class of which is traded throughout the day on at least one regulated market or Multilateral Trading Facility with at least one market maker which takes action to ensure that the stock exchange value of its units or shares does not significantly vary from its net asset value and where applicable its Indicative Net Asset Value. These requirements are summarised below. Disclosure rules apply immediately to any new UCITS ETF created after 18 February For existing UCITS ETFs created before that date, disclosure rules apply at the earlier of the first update of the prospectus, KIID or marketing material (as applicable) or 18 February Other requirements are immediately applicable to any UCITS ETFs, as specified below. Use of UCITS ETF identifier in name of fund or sub-fund Clear disclosure of portfolio transparency policy Clear disclosure of indicative NAV calculation and publication Actively-managed UCITS ETFs Secondary market warning disclosure Exceptional redemption right on primary market and prospectus A UCITS ETF should use the identifier UCITS ETF which identifies it as an exchange-traded fund. This identifier should be used in its name, fund rules or instrument of incorporation, prospectus, key investor information document and marketing communications. The identifier UCITS ETF should be used in all EU languages. A UCITS which is not a UCITS ETF (as defined in these guidelines) should use neither the UCITS ETF identifier nor ETF nor exchange-traded fund. This requirement applies to existing UCITS ETFs at the earlier of 18 February 2014 of the first name change for other reason. A UCITS ETF should disclose clearly in its prospectus, key investor information document and marketing communications the policy regarding portfolio transparency and where information on the portfolio may be obtained, including where the indicative net asset value, if applicable, is published. A UCITS ETF should also disclose clearly in its prospectus how the indicative net asset value is calculated, if applicable, and the frequency of calculation. An actively-managed UCITS ETF should inform investors clearly in its prospectus, key investor information document and marketing communications of that fact. An actively-managed UCITS ETF should disclose clearly in its prospectus, key investor information document and marketing communications how it will meet the stated investment policy including, where applicable, its intention to outperform an index. Where units of a UCITS ETF purchased on a secondary market are generally not redeemable from the fund, the prospectus and marketing communications of the fund should include the following warning: UCITS ETF s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them. If the stock exchange value of the units or shares of the UCITS ETF significantly varies from its net asset value, investors who have acquired their units or shares (or, where applicable, any right to acquire a unit or share that was granted by way of distributing a respective unit or share) on the secondary market should be allowed to sell them directly back to the UCITS ETF. For example, this may apply in cases of market disruption such as the absence of a market maker. In such situations, information should be communicated to the regulated market indicating that the UCITS ETF is open for direct redemptions at the level of the UCITS ETF. A UCITS ETF should disclose in its prospectus the process to be followed by investors who purchased their units/shares on the secondary market should the circumstances described above arise, as well as the potential costs involved. The costs should not be excessive. This requirement is immediately applicable to all UCITS ETFs. 9
12 V. Substance requirements 1. Designation of a management company In order to comply with the substance requirements of the 2010 Law, UCITS set up as FCPs must be managed by a management company subject to Chapter 15 of the 2010 Law. UCITS set up as a SICAV or SICAF subject to Part I of the 2010 Law may either be self-managed (see point 2 below) or designate a management company subject to Chapter 15 of the 2010 Law in order to fulfil the substance requirements. CSSF Circular 12/546 further specifies the substance requirements. Chapter 15 of the 2010 Law 10 Scope of application Permitted activities Shareholding Own funds/share capital requirements Board of directors Applies to management companies managing at least one UCITS; Benefits from the European passport. Core services: provision of collective portfolio management services (including asset management, administration and marketing); Additional services: - Management of individual portfolios on a discretionary and individual basis; - On an ancillary basis, investment advice concerning one or more of the instruments listed in Annex II, Section B of the 1993 Law; - On an ancillary basis, safekeeping and administration of shares/units of UCIs. The shareholding structure must be transparent and conflicts of interests must be mitigated and controlled. Identity of shareholders and the amount of the relevant holdings, as well as any changes therein must be communicated to the CSSF. The relevant shareholders must be of good repute and perform their duties in a manner to ensure the good and prudent management of the management company. The share capital of the shareholders must be sufficient to allow them to take a participation in the management company. Specific requirements may arise where one shareholder or member who has a qualifying holding in the management company is a depositary bank of one of the investment funds managed by the management company. In addition, the board of directors of the management company shall not be predominantly composed of representatives of the business line depositary bank. Circular 12/546 also provides that the CSSF may now require a letter of intent (please see chapter I above). Minimum capital requirements: initial capital of at least EUR 125,000. If the value of the portfolios managed by a management company exceeds EUR 250 million, the capital must be increased by an additional amount equal to 0.02% of the amount by which the value of the managed portfolios exceeds EUR 250 million, provided that a management company is not required to have a capital of more than EUR 10 million. The portfolios of the following entities are deemed to be the portfolios of a management company: - The portfolios of the common funds managed by the management company (including the portfolios for which the management has been delegated to third parties); and - The portfolios of the investment companies for which the management company is the designated management company; - The portfolios of other UCIs managed by the management company (including the ones for which the management is delegated to third parties). Portfolios managed under delegation from third parties are not taken into consideration. No requirement to provide up to 50% of the additional amount of own funds if a guarantee of the same amount is granted by a credit institution or an insurance undertaking, having its registered office in a Member State or in a non-member State, provided it is subject to prudential rules considered by the CSSF as equivalent to the EU prudential rules. Management companies authorised to carry out management of individual portfolios on a discretionary and individual basis have to comply with additional capital requirements set forth in Circular 07/290. Directors must be of good repute and have adequate professional experience. They must dedicate the required time and attention to their duties and so limit the number of other professional engagements as may be necessary. Where a bank is shareholder of a management company and where this bank assumes the function of depositary bank for one or more fund(s) managed by the management company, it must be ensured that the board of directors of the management company is not predominantly composed of representatives of the business line depositary bank. Where the SICAV has designated a management company, it is recommended that the board of directors of both the SICAV and the management company are not predominantly composed of the same individuals.
13 IV. Substance requirements Conducting persons/ Management Committee Central administration Technical and human infrastructure Administrative and accounting requirements Complaint handling Permanent compliance function Permanent internal audit function Permanent risk management function and risk management process Personal transactions Conflicts of interest Rules of conduct Prudential supervision The business of the management company must be conducting by at least two persons of good repute and having the adequate professional experience, who must, in principle, reside on a permanent basis in Luxembourg (possibility of derogation depending on the nature, scale and complexity of the activities of the management company). Each conducting person is assigned specific areas of responsibilities. The conducting persons form a management committee and shall hold periodic meetings formalised in written minutes available at the premises of the management company in Luxembourg. The conducting persons act under the ultimate responsibility of the board of directors of the management company. Each management company must have a head office in Luxembourg consisting of a decision-making centre and an administrative centre. - Permanent staff, which is suitable for the contemplated activities; - Systems and procedures to safeguard the security, integrity and confidentiality of information; - Adequate business continuity policy to ensure the preservation of essential data and functions and the maintenance of services and activities. Adequate technical infrastructure, including i.a. sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms. - Adequate and orderly maintenance of records relating to the management company s business and internal organisation; - Accounting policies and procedures (to ensure the proper and accurate valuation of assets); - A person in charge of the accounting function must be designated and his/her name must be communicated to the CSSF. - Implementation of procedures for the prompt handling of investors complaints; - Investors must have access to this information free of charge; - Communication to the CSSF of the name of a person responsible for the complaints handling process. - The purpose of the compliance is a regular control associated with an on-going and close monitoring of the management company s operations and related risks; - Drafting of a compliance charter and a compliance policy; - Establishment of a permanent compliance function and designation of a compliance officer whose name will be communicated to the CSSF; - Possibility for delegation to third-parties; - Annual report on compliance to be submitted to the CSSF. - Establishment of a permanent internal audit function and designation of a responsible person whose name will be communicated to the CSSF. - A management company must establish and maintain operational a permanent risk management function and employ a risk management process which enables it to control and measure at any time the risk of the position and their contribution to the overall risk profile; - Please refer to chapter IX below. - Procedure relating to personal transactions; - List of all personal transactions available at the registered office of the management company. - Identification of potential conflicts of interest; - Establishment of a conflicts of interest policy; - Record and management of activities leading to conflicts of interest entailing a material risk of damage; - Strategy for the exercise of voting rights. Management companies must comply with a certain number of rules of conduct (article 111 of the 2010 Law and Regulation 10-4): - Action in the best interests of UCITS and unit-holders: fair treatment of unit-holders; prevention of practices affecting the stability and integrity of markets; use of fair, correct and transparent pricing models and valuation systems; prevention of undue costs; - Due diligence requirements: high level of diligence in the selection and ongoing monitoring of investments; adequate knowledge and understanding of invested assets; compliance of investment decisions with investment objectives and strategies as well as with risk limits; due skill, care and diligence in the performance of risk management; - Reporting of subscription and redemption orders: executed orders must be notified to unit-holders; notification of transactions executed periodically for a unit-holder may be made every six months; information to unit-holders, upon request, as to the status of pending orders; - Best execution: establishment and implementation of effective arrangements for complying with best execution (directly or with other entities for execution); monitoring and review of the execution policy; - Handling of orders: procedures for the prompt, fair and expeditious execution of portfolio transactions, policy for the aggregation and allocation of trading orders; - Inducements: prohibition on fees, commissions and non-monetary benefits paid or provided by or to management companies, except where: Paid or provided to or by UCITS or on behalf of UCITS; - Paid or provided to or by a third party (other than the UCITS), if there is appropriate disclosure and enhanced service quality, or Fees properly due. Subject to the prudential supervision of the CSSF. Delegation of activities Possibility to delegate activities to third parties, subject to stringent conditions disclosed in article 110 of the 2010 Law and Circular 12/546. Such delegation must not affect the management company s and the custodian bank s liability. The management company must verify and monitor that the delegates have taken suitable measures so as to comply with the requirements in the areas of organisation, conflicts of interest and rules of conduct. 11
14 IV. Substance requirements Programme of activities/ business plan Supervision MiFID The request for authorisation includes a programme of activities which notably provides a description of the business development plan in terms of: - Scope of proposed services for the next three financial years; - Investment policies, instruments and financial markets concerned - Risk management process; - Provisional accounts for the three following years, and - Development strategy; - Programme of operations and management information system. Supervision of annual accounts of the management company must be effected by an authorised external auditor (réviseur d entreprises agréé) with adequate professional experience. Management companies exercising collective portfolio management (investment management, administration and/or marketing) are excluded from MiFID provisions; Management companies providing additional services (as described above) must comply with certain MiFID provisions such as the organisational requirements and conduct of business rules. 2. Self-managed SICAV/SICAF As an alternative to the designation of a management company subject to Chapter 15 of the 2010 Law, a SICAV or SICAF may opt for the status of self-managed SICAV/SICAF. Status Own funds/share capital requirements Board of directors Conducting persons Central administration Technical and human infrastructure Administrative and accounting requirements Complaints handling Permanent compliance function Permanent internal control function Permanent risk management function Personal transactions Conflicts of interest Rules of conduct Delegation of activities Programme of activities/business plan Prudential supervision MiFID A self-managed SICAV/SICAF may only manage its own assets. EUR 300,000 upon creation; Minimum capital requirement of EUR 1,250,000 to be reached within 6 months as from authorisation date. Idem as for the management company. Idem as for the management company. Idem as for the management company. Idem as for the management company. Not required for self-managed SICAV/SICAF. Idem as for the management company. Not required for self-managed SICAV/SICAF. Not required for self-managed SICAV/SICAF. Idem as for the management company. Not required for self-managed SICAV/SICAF. Idem as for the management company. Idem as for the management company. Idem as for the management company. Idem as for the management company. Idem as for the management company. Self-managed SICAV/SICAF is excluded from MiFID provisions. 12
15 VI. Service providers 1. Luxembourg-based service providers Custodian Central administration Auditor Any UCITS must appoint a custodian which must be approved by the CSSF. The custodian must either have its registered office in Luxembourg or be established in Luxembourg if its registered office is in another Member State of the EU. The custodian of a UCITS is entrusted with the following duties: - Safekeeping of the assets of the UCITS; - Monitoring of the assets of the UCITS (i.e. know at any time where the assets of the UCITS have been invested and where and how such assets are available). The custodian is vested with additional supervisory functions depending on the type of UCITS concerned. It must ensure: (i) that the sale, issue, repurchase and cancellation of shares/ units effected by or on behalf of the UCITS are carried out in accordance with the law and the constitutive documents of the UCITS; (ii) that the consideration for transactions involving the assets of the UCITS is remitted to the UCITS within the usual time limits; and (iii) that the income of the UCITS is applied in accordance with its constitutive documents. For an FCP, the custodian must also ensure that (i) the instructions of the management company comply with the applicable laws and regulations and with the management regulations of the FCP, and (ii) the value of units is calculated in accordance with the law and the management regulations. In case of an FCP, the custodian carries out the day-to-day administration of the assets (collection of dividends, interests, exercise of option rights etc.). The central administration must be situated in Luxembourg. This means that (i) the accounts of the UCITS have to be kept and be available in Luxembourg; (ii) the issues and redemptions have to be processed in Luxembourg; (iii) the register of shares/units has to be kept in Luxembourg; (iv) the prospectus, KIIDs, financial reports and other documents intended for investors have to be established in co-operation with the central administration agent in Luxembourg; (v) the dispatch of correspondence, notices and reports to unitholders/shareholders has to be made from Luxembourg; and (vi) the calculation of the net asset value has to be performed in Luxembourg. Due to the technical and human infrastructure necessary to perform these duties, Luxembourg UCITS almost systematically appoint a central administration agent in Luxembourg, subject to CSSF approval, in order to perform these duties. The central administration functions are in practice often splitted between different service providers: issues and redemptions as well as the register of shares/units are handled by the registrar and transfer agent, any aspects regarding the domiciliation (i.e. provision of a registered office to the UCITS and services of any kind connected therewith) are handled by the domiciliary agent, whereas the other functions are handled by the administrative agent. The UCITS accounts must be audited at least once a year by an authorised external auditor (réviseur d entreprises agréé) designated by the UCITS, with the approval of the CSSF. 13
16 V. Service providers 2. Other service providers (not necessarily based in Luxembourg) Investment manager Investment advisor Distributor Paying agent Market maker Nominee The investment manager is in charge of the intellectual management of the UCITS. The investment manager is subject to CSSF prior approval. It does not need to be located in Luxembourg, but must be subject to regulatory supervision. For investment managers located in third countries, there must be a cooperation between the CSSF and the supervisory authority of the investment manager. The investment advisor is a professional providing investment advice to a UCITS, either at the initiative of the investment manager, or upon the UCITS request, in respect of transactions relating to financial instruments. The investment advisor is not authorised to intervene directly or indirectly in the implementation of the investment advice provided. There is no requirement as regards prior approval by the CSSF. The distributor is an intermediary who is part of the distribution process set up by the promoter either actively participating in the marketing of the shares/units issued by a UCITS or appointed in the prospectus or in any other document as being authorised to receive subscription and redemption orders on behalf of the UCITS. The paying agent is the professional who receives the monies from investors and pays investors (in case of repurchases or dividend payments). There is usually a paying agent per country of registration of the UCITS. The market maker is an intermediary participating for its own account and at its own risk in subscription and redemption transactions on shares/units issued by UCITS. The nominee is an intermediary who intervenes between the investors and the UCITS for the purpose of effecting subscriptions of shares/units in the UCITS in its own name but on behalf of the underlying investors. 3. Conditions for authorisation to delegate activities 14 Where the management company or the self-managed SICAV decides to delegate to third parties one or more of its functions, it shall comply with the requirements of the Circular 12/546 and in particular with the following conditions: - Prior authorisation by the CSSF, - Monitoring of delegated activities may not be delegated, - Extent of delegation may not reduce the management company/self-managed SICAV to a letter-box entity, - Any delegation arrangements do not affect the management company/self-managed SICAV liability, - Notification to the CSSF of a possible sub-delegation, - Written initial and ongoing due diligence on the service provider, - Written agreement between the management company/self-managed SICAV and the service provider, - Delegation must not prevent effectiveness of supervision by the CSSF, - Delegation must not prevent the management company/self-managed SICAV from acting in the best interests of investors, - Implementation of control arrangements to access data documenting the activities of the delegate, - Possibility for the conducting persons to give additional instructions to the delegate and to withdraw the mandate with immediate effect if investor s interests so require, - Disclosure of the delegation within the prospectus. Specific conditions for the delegation of the investment management and of the administrative function are set out in the Circular 12/546.
17 VII. Eligible assets 1. Overview Legal and regulatory provisions/cesr s guidelines Eligible assets for UCITS - UCITS Directive; - Directive 2007/16/EC; Law; - Grand-Ducal Regulation on eligible assets; - CESR s Guidelines b; - CESR s Guidelines ; - ESMA Guidelines 2012/832; - Circular 08/380; - Circular 08/ TS and structured financial instruments; - MMI; - Units of UCITS and other eligible UCIs; - Deposits with credit institutions; - FDI based on eligible underlying assets. 2. Eligibility A. Transferable Securities ( TS ) Yes No Listing 1 Is the TS listed? Continue with 2. Not eligible except within the 10% trash ratio: continue with 3. Liquidity 2 Presumption of liquidity and negotiability but: Continue with 3. Continue with 4. is there any reason to believe that the liquidity of the TS is not guaranteed? 3 Is the liquidity of the TS satisfied? The following parameters have to be Continue with 4. Continue with 3bis. considered: - Volume and turnover in the security; - Issue size/portion to buy/timeframe to buy/sell; - Independent analysis of bid/offer prices; - Quality/number of intermediaries dealing in the security. 3 bis Is there a potential impact on the ability of the UCITS to ensure redemption Not eligible. Continue with 4. requests of its investors? Potential loss 4 Is there a risk for the UCITS to incur potential losses beyond the amount paid Not eligible. Continue with 5. to purchase the TS? Available information 5 Are there accurate, reliable and regular prices available for the TS? Continue with 6. Not eligible. 6 Is there regular, accurate and comprehensive information available on the TS? Continue with 7. Not eligible. Negotiability 7 Is the TS negotiable? Continue with 8. Not eligible. 15
18 VI. Eligible assets A. Transferable Securities ( TS ) Investment objective of the TS 8 Is an investment in the TS consistent with the investment objectives of the Continue with 9. Not eligible. UCITS? TS embedding FDI 9 Does the TS embed a FDI i.e. is the TS a host contract for a variable Continue with 9 bis. Continue with 10. component which (all criteria have to be met): - Modifies the cash flows of the TS in a similar way to a stand-alone FDI - Has economic characteristics and risks not closely related to that of the host contract - Has an impact on the risk profile and pricing of the TS 9 bis Is the embedded FDI eligible? (see point C. FDI ) Continue with 9 ter. Not eligible. 9 ter Is the embedded FDI: Continue with 10. N/A. - Included in the risk management process of the UCITS? - Included in the UCITS global exposure? - Combined with issuer limits? (all criteria have to be met) Adequate risk management process 10 Is the TS duly covered by the risk management process of the UCITS? Eligible. Not eligible. Yes No B. Money Market Instruments ( MMI ) 16 Yes A. Is the instrument admitted to trading or normally dealt in on the money market? 1 Is its maturity at issuance of up to and including 397 days? The instrument is normally dealt in on the money market: continue with B. 2 Is its residual maturity of up to and including 397 days? The instrument is normally dealt in on the money market: continue with B. 3 Are there at least every 397 days yield adjustments in line with money market conditions? The instrument is normally dealt in on the money market: continue with B. 4 Can it be demonstrated that the instrument has the risk profile of a MMI? The instrument is normally dealt in on the money market: continue with B. B. Can the value of the instrument be accurately determined at any time? 5 Is there a market price? The value of the instrument can be accurately determined at any time: continue with C. 6 Can its value be determined using a model? Continue with C. Under CESR s Guidelines b, an amortization method can be used under certain conditions (in particular, that this will not result in a material discrepancy between the market value of the MMI and the value calculated according to the amortization method). C. Is the instrument liquid? 7 Is the instrument admitted to trading on a regulated market? The instrument is presumed to be liquid: continue with D. 8 Is the liquidity at issue level sufficiently assessed, based on the following Continue with 9. criteria: - Frequency of trades; - Number of dealers; - Size of issuance; - Possibility to convert into cash within 7 days. No Continue with 2. Continue with 3. Continue with 4. Not a MMI. Continue with 6. Not eligible. Continue with 8. Not eligible.
19 VI. Eligible assets B. Money Market Instruments ( MMI ) 9 Is the liquidity at fund level sufficiently assessed, based on the following criteria: - Unitholder structure/concentration; - Purpose of funding; - Good information on cash flows; - Prospectus guidelines in relation to limitation on redemptions. D. Under which caption is the MMI eligible? 10 Is the MMI eligible under one of the following: - Admitted or dealt in on a regulated market? - Dealt in on another market in the EU, regulated, recognised and open to the public? - Admitted to official listing outside the EU, recognised and open to the public and indicated in the prospectus? - A recently issued MMI? - Issued by an issuer which is regulated for the purpose of protecting investors and savings and the MMI is: (i) Issued or guaranteed by a central, regional or local authority or by a central bank of a Member State, the European Central Bank, the EU or the European Investment Bank, a non-member State or, in case of a Federal State, by one of the members making up the federation, or by a public international body to which one or more Member States belong? or (ii) Issued by an undertaking any securities of which are dealt in on regulated markets? or (iii) Issued or guaranteed by an establishment subject to prudential supervision, in accordance with criteria defined by Community law, or by an establishment which is subject to and complies with prudential rules considered by the CSSF to be at least as stringent as those laid down by Community law? or (iv) Issued by other bodies belonging to the categories approved by the CSSF provided that investments in such instruments are subject to investor protection equivalent to that laid down in the first, the second or the third indent and provided that the issuer is a company whose capital and reserves amount to at least EUR 10,000,000 and which presents and publishes its annual accounts in accordance with the fourth Directive 78/660/EEC, or an entity which, within a group of companies which includes one or several listed companies, is dedicated to the financing of the group or is an entity which is dedicated to the financing of securitisation vehicles which benefit from a banking liquidity line? Yes No The instrument is liquid: Not eligible. continue with D. Eligible. Continue with 11. Eligible. Not eligible. C. Financial Derivative Instruments ("FDI") Yes No 1 Is the underlying of the FDI eligible? Continue with 2 or 3. Not eligible. 2 For over-the-counter FDI ( OTC FDI ): Eligible. Not eligible. - Is the counterparty of such OTC FDI eligible (subject to prudential supervision/approved by the CSSF)? and - Is there a reliable and verifiable valuation of the OTC FDI which can be sold at any time at its fair value? Fair value is to be understood as a valuation which does not rely only on market quotations by the counterparty and which fulfils the following criteria: - The basis for the valuation is either a reliable up-to-date market value of the instrument, or, if such a value is not available, a pricing model using an adequate recognised methodology; - Verification of the valuation is carried out by one of the following: An appropriate third party which is independent from the counterparty of the OTC FDI, at an adequate frequency and in such a way that the UCITS is able to check it; A unit within the UCITS which is independent from the department in charge of managing the assets and which is adequately equipped for such purpose. 3 For listed FDI: is the FDI listed on a regulated market? Eligible. Not eligible. 17
20 VI. Eligible assets 3. Investment restrictions A. Type of instruments TS and MMI Rule of 10% Exception of 25% Exception of 35% Exception of 100% Maximum 10% of the UCITS net assets in TS or MMI issued by the same issuer. Maximum 25% of the UCITS net assets in debt securities issued by a credit institution which has its registered office in a Member State of the EU and which, under applicable law, is submitted to specific public supervision in order to protect the holders of such qualifying debt securities. Note: If the UCITS invests more than 5% of its net assets in this type of debt securities issued by one single issuer, the total value of such investments may not exceed 80% of its net assets. Maximum 35% of the UCITS net assets in TS or MMI issued or guaranteed by a Member State of the EU, by its local authorities, by a non-member State of the EU or by public international bodies of which one or more Member States of the EU are members. Upon authorisation from the CSSF, up to 100% of the UCITS net assets in TS and MMI issued or guaranteed by a Member State of the EU, by its local authorities, by a non- Member State of the EU or by public international bodies of which one or more Member States of the EU are members, provided that (i) such securities are part of at least six different issues and (ii) the securities from any such issue do not account for more than 30% of the total amount. B. Risk-spreading obligation The aggregate value of TS and MMI held by a UCITS in the issuers in which it invests more than 5% is limited to 40% of its net assets ( 5/10/40 rule). Are not taken into account in the 40% limit: Deposits and OTC FDI made with financial institutions subject to prudential supervision, and TS and MMI acquired by virtue of the 25% and 35% exceptions above. C. Financial indices 18 Eligibility Diversification criteria ESMA Guidelines 2012/832: additional conditions for financial indices The composition of the index must be sufficiently diversified; The index must represent an adequate benchmark for the market to which it refers; The index must be published in an appropriate manner. Maximum 20% for investments in shares and/or debt securities issued by the same body when the aim of the UCITS investment policy is to replicate the composition of a certain stock or debt securities index which is recognised by the regulatory authority. The limit of 20% is raised to 35% when justified by exceptional market conditions, in particular in regulated markets where certain TS or MMI are highly dominant. The investment up to this limit is only permitted for a single issuer. ESMA Guidelines 2012/832 impose a number of additional conditions on financial indices. These conditions apply immediately to all new UCITS created after 18 February Existing UCITS created before that date benefit from a 1-year transition period; in addition, existing UCITS benefit from a transition period for disclosure rules, which apply at the earlier of the first update of the prospectus or 18 February These conditions can be summarised as follows: - Use of 20/35% diversification limits clearly disclosed in the prospectus; - Impact of a single component on the overall index return limited to 20/35%; - All commodity indices to comply with diversification limits, taking into account correlation (this modifies CESR s Guidelines b which allowed the use of single commodity indices and nondiversified indices for diversification purposes); - Benchmark test reinforced (index objective and design process are specifically considered); - Disclosure of rebalancing frequency and costs in the prospectus. No daily or intraday rebalancing (except technical adjustments); - Disclosure of full index calculation methodology. Retrospective publication of components and weightings; - Rules-based methodology for the selection and rebalancing of components; - Assessment of the quality of the index and due diligence process; - Independent valuation of the index.