www.pwc.lu/ucits Eligibility of financial instruments for UCITS Grand-Ducal Regulation of 8 February 2008 transposing the Directive 2007/16/EC on eligible assets, ESMA Guidelines 2014/937 on ETFs and other UCITS issues February 2015 Eligibility of financial instruments for UCITS Financial Derivative Instrument? Transferable Security? (4) yes yes 1. Eligible assets for UCITS 2. Interest rates 3. Foreign exchanges rates/currencies (5) no Is it sufficiently diversified? no no 1. Individual price movements are sufficiently uncorrelated to not influence the performance of the whole index 2. Maximum 20% per component with only one component up to 35% 3. If the index is composed of several commodities, sub-categories of the same commodities are considered as the same commodity if they are highly correlated yes Is the index a representative benchmark? no 1. The index measures the performance of a representative group 2. It is revised and rebalanced periodically 3. Underlyings are sufficiently liquid (possiblity to replicate it if necessary) no no 1. Sound procedures to collect prices, calculate the index and publish it 2. Information provided on a wide and timely basis 3. Full calculation methodology and/or components/weights are available free of charge 1. 2. 3. 4. 5. Potential loss limited to the amount paid for purchasing the security Liquidity (3) Negotiability (3) Consistent with the investment objectives of the UCITS Risks adequately captured by Risk Management Process no Is it listed on an official stock exchange or traded on a regulated market? Is the issue or issuer regulated in order to protect investors and savings? no 1. Information available allowing appropriate assessment of credit risks 2. Freely transferable yes no yes yes Is the counterparty subject to prudential supervision? no yes Is the derivative subject to reliable and verifiable valuation on a daily basis? 1. Fair value which does not rely on market quotations from the counterparty 2. Either market value or value determined by a pricing model using a recognised methodology 3. Verification of the valuation: third party independent from the investment manager and with adequate resources yes yes yes yes Issued or guaranteed by a state issuer/ supranational issuer? Issued by an undertaking any securities of which are listed? Issued or guaranteed by an establishment subject to prudential supervision? Issued entities belonging to categories approved by the CSSF? yes yes yes yes yes no Is the security listed? no Issued by an establishment either: yes Does the derivative not result in the delivery or the transfer of non-eligible assets? E.g. bank loans, commodities no Are the following eligibility criteria fulfilled? 1. Valuation: reliable prices available on a periodic basis derived from issuers or competent investment research 2. Information: regular and accurate yes Are the risks adequately captured by the Risk Management Process of the UCITS? no Is the index subject to an independent valuation? yes yes no Are the following eligibility criteria fulfilled? 1. Valuation: accurate, reliable, regular prices (market prices or prices made available by systems independent from issuers) 2. Information: regular, accurate and comprehensive Issued by a securitisation vehicle which benefits from a banking liquidity line secured by an establishment either: 1. Located in the EEA or 2. Located in an OECD country belonging to the group of Ten (2) or 3. At least investment grade or 4. It can be demonstrated by an in-depth analysis on a case-by-case basis yes yes no no Is the derivative an OTC derivative? yes Is it published in an appropriate manner? Are the following eligibility criteria fulfilled? no yes yes 1. Normally dealt in on the money market 2. Value can be accurately determined at any time 3. Liquid (1) no no Is the underlying an eligible asset? i.e. Money Market Instrument? (6) i.e. Is the underlying a financial index? Is it an eligible financial index? www.pwc.lu/ucits no 1. Located in the EEA or 2. Located in an OECD country belonging to the group of Ten (2) or 3. At least investment grade or 4. It can be demonstrated by an in-depth analysis on a case-by-case basis yes yes yes no no yes (1) yes yes Eligible Financial Derivative Instrument What do the smileys mean? Eligible Not eligible Eligible within the trash ratio of 10% (article 41(2)a) of the 2010 law) What do the footnotes mean? 1. 2. 3. 4. • • • 5. 6. • • • • 7. Converted into cash within 7 business days Group of Ten: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States Presumption of liquidity and negotiability when a transferable security is admitted to an official stock exchange Closed-ended funds are considered as eligible transferable securities for UCITS provided that: they comply with the eligibility criteria applicable to transferable securities they are subject to corporate governance mechanisms (right to vote in the essential decision making processes of the fund, right to control the investment policy) the asset management activities are carried out by an entity subject to national regulation designed to protect investors Eligible assets for UCITS (transferable securities, money market instruments, shares/units of UCITS/UCIs, bank deposits, derivatives) Financial instruments which have a maturity at issuance up to and including 397 days have a residual maturity of up to and including 397 days undergo regular yield adjustments in line with the money market conditions at least every 397 days have a risk profile which corresponds to that of instruments which have a maturity of up to and including 397 days or are subject to a yield adjustment Stock indices or bonds indices not sufficiently diversifed are considered as baskets of equities/bonds (look-through principle does apply) yes yes yes yes yes yes yes yes Eligible Transferable Security or Money Market Instrument Key Restriction Reminders • • • • • • • • Single commodity indices are not eligible for UCITS “Highly-correlated” means that at least 25% of the correlation observations are above 0,8 5%/10%/40% limits are measurable at issuer level whereas the 20% combined limit is measurable at group level The global exposure of a UCITS to financial derivative instruments may not exceed 100% of its net assets The global exposure can be measured using the commitment approach or a VaR method depending on the risk profile of the UCITS In case of Relative VaR, the VaR of a UCITS may not exceed twice the VaR of a reference portfolio In case of Absolute VaR, the VaR threshold fixed by the UCITS on the basis of its investment policy and risk profile may not exceed 20% Borrowings/overdrafts are permitted up to 10% also for investment purpose but only fo a short period of time and not on a recurring basis Embedded derivatives There is an embedded derivative in a transferable security or in a money market instrument if yes 1. Some or all the cash flows of the transferable security or money market instrument (host contract) can be modified according to a variable 2. Its economic characteristics and risks are not closely related to the ones of the host contract 3. It has a significant impact on the risk profile and the pricing of the transferable security yes Your contacts Anne Laurent, Partner Regulatory Compliance Advisory Services +352 49 48 48 2131 anne.laurent@lu.pwc.com Embedded derivative should be taken into consideration in the context of articles 42, 43 and 46 of the 2010 law Stéphanie Jean, Senior Manager Regulatory Compliance Advisory Services +352 49 48 48 2283 stephanie.jean@lu.pwc.com 1. 2. 3. 4. Eligibility of the underlying Global exposure Look-through principle for the purpose of articles 43 and 46 of the 2010 law (diversification rules) Risk Management Process no Investment Management Compliance Services The EU and Luxembourg investment management regulatory frameworks not only provide market players with opportunities but also present compliance challenges. Managing compliance risks while catering various investors’ expectations is your key challenge. How we can help We provide online access to the IM Compliance WorkbenchTM database • IM Compliance WorkbenchTM is a user-friendly web-based database designed to provide our clients with access to a library of investment compliance related documents. It includes: ----- Product, index and stock exchange analysis; Technical notes; Applicable directives, laws, regulations and circulars; PwC weekly IM Regulatory Watch. We organise training sessions and bespoke workshops Our training sessions and workshops are tailored to your company’s needs. We assist you in the form of ad hoc advice and analysis • For Product Developers and/or Investment Managers ---- We do eligibility reviews of sophisticated financial products and complex derivative instruments; We support your company in the implementation of innovative investment strategies; We perform comparative analyses to identify the most suitable regulatory environment for your new fund. • For Legal Departments -- We do prospectus reviews to make sure that (i) all existing risks in terms of wording, format and presentation are identified, remediated and covered, (ii) consistency of the document is increased and the document landscape (e.g. KIID, Sales & Marketing material, homepage information) can be easily aligned, and (iii) we assist in the implementation of new regulatory and market requirements. • For Board Members or Conducting Persons ---- We perform on-going eligibility reviews of specific assets, stock exchanges or regulated markets for you; We analyse potential compliance issues; We perform periodic reviews of fund portfolios given the investment restictions and the eligibility criteria imposed by the law. • For Risk Managers We perform reviews of risk management processes for complex UCITS funds; We review operational risk management frameworks; We support you in the selection and implementation of risk management systems. • For Compliance Officers ---- We interpret regulations applicable to your product and business; We review your compliance control framework; We assist you in the selection and the review on investment guidelines monitoring set up. Follow us on ---- Your contacts: Anne Laurent, Partner Regulatory Compliance Advisory Services +352 49 48 48 2131 anne.laurent@lu.pwc.com Nathalie Dogniez, Partner Regulatory Compliance Advisory Services +352 49 48 48 2040 nathalie.dogniez@lu.pwc.com Nicole Schadeck, Senior Manager Regulatory Compliance Advisory Services +352 49 48 48 2164 nicole.schadeck@lu.pwc.com PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. 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