KIIDs – Structured Funds – Highwire Extensions

There are specific provisions in place as regards KIID requirements for “Structured UCITS”, including that the template can extend to 3 pages, rather than the normal 2 page document.

Structured Funds are defined at Article 36 of Commission Regulation for the KIID as:

“UCITS which provide investors, at certain pre-determined dates, with algorithm-based payoffs that are linked to the performance, or to the realization of price changes of other conditions, of financial assets, indices or reference portfolios or UCITS with similar features.”

Article 36 and the KIID provides that:

KIID shall not contain the “Past performance” section;
The “objectives and investment policy” section must include an explanation of how the formula works or how the pay-off is calculated;
The explanation is to be accompanied by illustration of at least three scenarios of potential performance

More information on the scenarios is set out below:

Structured Funds – the 3 scenarios

These scenarios are to show the circumstances in which the formula may generate a low, a medium or a high return, including, where applicable, a negative return for the investor.

The scenarios must present in a way that is fair, clear and not misleading, and likely to be understood by the average retail investor. They must not artificially magnify the importance of final performance of the UCITS.

Article 36 of the Regulation provides that:

The scenarios must be based on reasonable and conservative assumptions about future market conditions and price movements
Whenever the formula exposes investors to the possibility of substantial losses, such as a capital guarantee that functions only under certain circumstances, these losses shall be appropriately illustrated, even if the probability of the corresponding market conditions is low.
The scenarios must be accompanied by a statement that they are examples that are included to illustrate the formula, and do not represent a forecast of what might happen. It shall be made clear that the scenarios shown may not have an equal probability of occurrence.

ESMA’s Guidelines on Presentation of the scenarios provide that:

The scenarios shall be called Illustrative examples. The narrative shall make it clear that they are not forecasts and that they are not equally probable.
Each set of scenarios shall be presented as either tables or graphs, whichever is the clearer way to present the characteristics of each structured UCITS. Examples are set out in the Annex.
The illustrative returns in the various scenarios shall be displayed as an annualised rate of growth (with an appropriate explanation). However, the [capitalised/gross] rate of growth may also be shown.
To ensure the comprehensibility and the comparability of different graphs, the presentation shall avoid:
– double scales (left and right) whenever possible;
– artificially magnifying the positive aspects of the fund payout;
– non-linear scales;
– different scales depending on the scenario.
The narrative shall explain that investors can sell their units before the end date but it must include a prominent warning of the possible resulting loss on the investment.