Luxembourg and Ireland make clear that borrowing cannot be used for investment purposes. UK does not prohibit this.

The impact effectively is that whilst an Irish / Lux UCITS (using commitment approach) can have 200% total exposure, a UK UCITS can have 210% (100% through derivatives and another 10% through borrowing).

Malta has various subtleties as regards Back-to-back loans and an additional 15% limit.

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The UK rules clarifies that this should include capital cash (as distinct from income cash). In practice, we include all cash in this rule. We apply the same approach for Luxembourg and Ireland.

In Ireland, the 20% can only be with the depositary. Otherwise, a rule of max. 10% with any one deposit taker applies.

Ireland specify that max 10% in “ancillary liquid assets.” We consider “ancillary liquid assets” to be uninvested cash (as distinct from deposits).

UK and Luxembourg state that UCITS may have “ancillary liquid assets” but do not specify a limit.

However, the accepted interpretation in Luxembourg seems to be that a UCITS may have up to 50% in ancillary liquid assets, e.g. https://www.pwc.lu/en/asset-management/docs/pwc-amprofile-ucits.pdf.

Therefore, we take the following approach:

Luxembourg:

Note: Luxembourg simply states at 41(2) “A UCITS may hold ancillary liquid assets.” The preamble to the Luxembourg UCITS provisions //eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02009L0065-20140917&from=EN states the following at paragraph (41):

“In addition to the case in which a UCITS invests in bank deposits in accordance with its fund rules or instruments of incorporation, it should be possible to allow all UCITS to hold ancillary liquid assets, such as bank deposits at sight. The holding of such ancillary liquid assets may be justified, inter alia, in order to cover current or exceptional payments; in the case of sales, for the time necessary to reinvest in transferable securities, money market instruments or in other financial assets provided for in this Directive; or for a period of time strictly necessary when, because of unfavourable market conditions, the investment in transferable securities, money market instruments and in other financial assets is suspended.”

Historically, a more flexible approach was taken in Luxembourg whereby open end funds that do not meet the eligibility criteria for open end funds, could nevertheless form part of the 10% “trash ratio”.

However, following ESMA’s opinion on Article 50.2, it is clear that this approach is not possible and that open end funds must meet the criteria for open end fund eligibility – www.esma.europa.eu/system/files/2012-721.pdf.

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 UCITS Directive includes the significant influence rule of max 20% ownership of the voting shares in issuer of any issuer. Additionally, there are the following concentration rules:

A UCITS may acquire no more than:

In the UK, these concentration rules apply at the level of the Umbrella (e.g. ICVC level), whereas in Luxembourg and Ireland, these rules apply to the individual UCITS portfolio. The UK approach does seem to be super-equivalent to the UCITS Directive.

UCITS Directive Level

The UCITS provisions are set out at Article 56.2. This applies at “UCITS” level. Article 1b explains that UCITS “can have several compartments” – so “UCITS” is the Umbrella level.

However, in the UCITS Directive, the Investment rules are set out in Chapter 7, being Article 49 to 57, and Article 49 caveats Article 1b by providing that “Where UCITS comprise more than one investment compartment, each compartment shall be regarded as a separate UCITS for the purposes of this Chapter.” The concentration rules are set out in Article 56 and so are covered by this caveat.

United Kingdom

In the UK, the concentration rules are at COLL 5.2.29 and apply to a UCITS scheme [which means Umbrella – see below 5.2.30 below]:

However, in the case of the UK, whilst again “UCITS scheme” is to be taken, per COLL 5.2.30, as meaning sub-fund / portfolio for the UCITS investment rules, this does not extend to the concentration rules are COLL 5.2.29.

This is because COLL 5.2.30 provides that:

(1) In relation to a UCITS scheme which is an umbrella, the provisions in COLL 5.2 to COLL 5.5 apply to each sub-fund as they would for an authorised fund, except the following rules which apply at the level of the umbrella only:
(a) COLL 5.2.27 R (Significant influence for ICVCs);
(b) COLL 5.2.28 R (Significant influence for2 authorised fund managers of AUTs or ACSs2); and
(c) COLL 5.2.29 R (Concentration).

As above, the UCITS rules provide that any one CIS may invest max 25% in the UCITS of another CIS.

There are potential jurisdictional differences in how this applies; e.g.

In our understanding, the rules apply as follows:

As regards the numerator, as explained in point 6 above, it is Funds-Axis view that the UK rules are super-equivalent in this regard.

As regards the denominator, ESMA has clarified on 21 November 2016, that in all cases the relevant denominator is the shares in issue of the scheme invested into, rather than the shares in issues of the Umbrella invested into.

This is a departure from the previously understood position. It was previously believed that a UCITS could hold 100% of the shares in issue of any one scheme, so long as it holds less than 25% of the shares in issue of the Umbrella of that scheme. This previous understanding is based on a literal interpretation of the UCITS Directive, which does indicate that the denominator is Umbrella rather than scheme.

See below for the ESMA Q&A text:

Per ESMA Q&A

Question 4a

Pursuant to Article 56(2)(c) of the UCITS Directive, a UCITS may acquire no more than 25% of the units of any single UCITS or other collective investment undertaking. Where the underlying UCITS or other collective investment undertaking is an umbrella fund, should this limit be applied at the level of the umbrella or at the level of the individual sub-funds within the umbrella?

Answer 4a:

The limit set out in Article 56(2)(c) should be applied at the level of the individual sub-funds in the UCITS or collective investment undertaking of which the units are to be acquired, to ensure the principle of risk-spreading within the investing UCITS. Where an investment company or a management company is currently applying a different interpretation of this limit, it must at the earliest convenience adjust the funds’ portfolios whilst acting with due skill, care and diligence in the best interest of the UCITS it manages.

Between the jurisdictions, there are slight differences as regards the definition of approved counterparties.

Between the jurisdictions, there are slight differences as regards the definition of approved deposit takers.

CSSF will permit the use of side-pockets in exceptional circumstances.

The UK has expanded beyond the Eligible Assets Directive. The UK definitions link to the regulated activities order and the UK now has definitions such as “alternative debentures.”

The UK restricts share class level hedging to currency hedging; Ireland previously permitted allows interest rate and market risk hedging at a shareclass level. ESMA has now clarified that only currency hedging is permissible at a shareclass level.

In Ireland, currency hedging is limited to 105% of share class etc.

The following points in respect of the UK should also be noted: