Innovation
JULY 2012
Asset Management and Investment Funds Briefing
UCITS and the use of leverage
On 9 July 2012 ESMA issued a question and answers document1 in
relation to its risk measurement guidelines for UCITS2. The Q&A
document is intended to address the divergent approaches which had
developed across the EU on particular issues and seeks to ensure that
a common supervisory approach and common practices are followed
throughout the EU. In response to the issue of the ESMA Q&A the
Central Bank has issued a letter to the Irish funds industry addressing
its requirements where leverage is used by UCITS. The purpose of
this client briefing is to explain the Central Bank’s requirements on
the calculation of leverage and the disclosure required in a UCITS
prospectus relating to leverage.
Gross Notional Leverage
The ESMA Q&A states that for any UCITS using Value at Risk (“VaR”) to calculate global
exposure the leverage disclosed by that UCITS must be calculated as the sum of the notionals
of the derivatives used. Leverage must not be calculated on a net basis (i.e., leverage
calculated after any netting/hedging arrangements are taken into account). This leverage
figure (based on the sum of the notionals) can be supplemented by also disclosing the
leverage calculated on the basis of the commitment approach. However, the commitment
approach cannot be used as an alternative to the sum of the notionals figure.
Whilst it is acknowledged that there are limitations on the use of the sum of the notionals
as a measure of the risk profile of a UCITS, this clarification of the disclosure requirement is
welcome if for no other reason than it should ensure that a consistent approach is now taken
by regulators across the EU.
Minimum Subscription Amount
This document contains a general
summary of developments and is not
a complete or definitive statement of
the law. Specific legal advice should
be obtained where appropriate.
For UCITS funds established since July 2011 with leverage limits in excess of 500% the
Central Bank has generally imposed both a minimum subscription requirement and a
restriction on the limit of leverage employed by the fund. The application of this policy
by the Central Bank presented various practical issues for a number of promoters who
employed significant leverage in their UCITS. However, as a consequence of the publication
of the ESMA Q&A the Central Bank has agreed that it will no longer impose a minimum
1
2012/ESMA 429
2
CESR/10/788 - Guidelines on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS
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UCITS AND THE USE OF LEVERAGE
JULY 2012
subscription requirement or limit the level of leverage
employed by Irish authorised UCITS.
For those UCITS which had included a minimum
subscription amount in their prospectus and a limit on the
level of leverage to be used by the fund amendments to the
prospectus deleting these requirements will be required if
they wish to avail of the new rules.
Reporting
It is also worth noting that the Central Bank had required
those UCITS whose global exposure may be in excess of 500%
based on the sum of the notionals to report the actual levels
of leverage in a written report to the Central Bank on a six
monthly basis. The Central Bank has confirmed that it will no
longer require this six monthly report from these UCITS.
Conclusion
The clarification of the way in which the leverage is to be
calculated in the ESMA Q&A provides the certainty the
funds industry needed to ensure that all UCITS using VaR,
irrespective of domicile, calculate and disclose the leverage
figure in the same way. The decision by the Central Bank
to dispense with the minimum subscription requirement
and limit on the level of leverage employed by an Irish
authorised UCITS is also a welcome change.
Contacts
If you would like further information on the information in this bulletin please contact one of the partners in the Asset
Management and Investment Funds Group.
Carl O’Sullivan Partner
Asset Management and
Investment Funds Group
Kevin Murphy Partner
Asset Management and
Investment Funds Group
+353 (0)1 618 0525
carl.osullivan@arthurcox.com
+353 (0)1 618 0515
kevin.murphy@arthurcox.com
Sarah Cunniff Partner
Asset Management and
Investment Funds Group
Dara Harrington Partner
Asset Management and
Investment Funds Group
+353 (0)1 618 0508
sarah.cunniff@arthurcox.com
+353 (0)1 618 0559
dara.harrington@arthurcox.com
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