Different jurisdictions take different approaches as to whether the UCITS diversification rules apply at issuer group level or allow the derogation for these to apply at issuer level.

In Malta, this is covered at Article 5.36 Para 2 where it provides that

“Companies which are included in the same group for the purposes of consolidated accounts as defined in Directive 83/349/EEC in accordance with recognized international accounting rules, are regarded as a single body for the purpose of calculating the limits contained in SLC Article 5.6 to Article 5.10, Article 5.12, Article 5.14, Article 5.35 and Article 5.36. Subject to approval by MFSA, the Scheme may affect a cumulative investment in Transferable Securities and Money Market Instruments within the same group up to a limit of 20 per cent.”

This also covers the:

Therefore, the starting point is that all these rules apply at Group level. However, the impact of the 2nd paragraph is that “subject to approval by MFSA”, the rules at Article 5.6 – Article 5.9 and Article 5.10 (which relate to transferable securities and money market instruments) can apply at Issuer level rather than issuer group level.

Based on this, our standard UCITS rule library for Malta applies the 5/10/40 rules at Issuer level rather than Issuer Group level.

However, Article 5.12 on Deposits and Article 5.14 on OTC Counterparty exposure would appear to apply at Group level.

Following the UCITS Eligible Asset Directive and ESMA’s related Guidelines, it is clear that closed end funds are to be treated as securities and need to meet the standard criteria in respect of transferable securities and addition criteria specific to closed end funds, including in respect of asset segregation, the fund or investment manager being regulated for the purposes of investor protection and there being in pace corporate governance mechanisms normally applied to companies.

These provisions are not set out in the MFSA Rulebook. However, we understand that they should be understood to apply.

Approved OTC Counterparties are defined at Article 5.23.

As well as the standard UCITS 100% limit on FDI commitment exposure, the Malta Rules also contain a Max 200% restrictions on total portfolio exposure, see Article 5.11. These are structurally different calculations and it maybe that a fund is in compliance with one but not the other.

In calculating the cover required for cash settled derivatives, the MFSA has set out provisions on minimum levels of haircuts. This is at Article 5.24 where it provides that acceptable liquid cover is:

The standard UCITS limit is maximum 10% NAV in borrowing. Malta has 2 subtleties to this:

In this regard note that, as per the UCITS Directive, UCITS are not allowed to invest in immovable property other than for acquisition of immovable property essential for the direct pursuit of its business. This is a rarely used permission, other than for self-managed funds.

The MFSA Rules at Article 5.48 state that:

“The Scheme shall, in as far as these may be applicable to any foreign currency lending which it may carry out, abide by the high level principles on foreign currency lending as outlined in MFSA Rule 1 of 2012. 5.48 Para 2 provides that “Foreign currency lending means lending in any currency other than the legal tender of the country in which the borrower is domiciled. This includes situations where the Euro is the foreign currency due to the borrower’s domicile being outside the euro zone.”

It is not clear why this provision is included as UCITS cannot grant loans – see MFSA Article 5.51.

For significant influence and ownership rules, the standard exemption as regards government and public securities is at Article 5.46

For diversification rules, the standard requirement to look through derivatives, is at Article 5.20. the standard exemption from having to look through derivatives on eligible financial indices is at Article 5.21