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.
The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 157 countries and employ
more than 195,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu.
© 2015 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative
(Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited (“PwC IL”), each member firm of which is a separate and independent legal entity.
PwC IL cannot be held liable in any way for the acts or omissions of its member firms.