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European regulator Esma publishes ETF and Ucits guidelines

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The European Securities & Markets Authority has published guidelines on exchange-traded funds and other Ucits products.

According to Esma, the guidelines will strengthen investor protection and set out the types of financial index Ucits products can invest in.

Esma chair Steven Maijoor says: “These comprehensive guidelines are aimed at strengthening investor protection and harmonising regulatory practices across this important EU fund sector.

“They increase the level and the quality of information provided by Ucits to their investors, clarify the criteria for the management of collateralised transactions such as securities lending, repo and reverse repos and OTC [over the counter] derivatives, and set out the types of financial index in which Ucits may invest.

“Furthermore, these guidelines are a valuable response to many of the issues identified in the on-going debate on shadow banking and will constitute and important step in the development of the regulatory framework of Ucits.”

The guidelines will see some ETFs identified as Ucits ETFs. Ucits ETFs will be forced to open the fund for direct redemptions when liquidity in the secondary market is not satisfactory.

Ucits taking part in securities lending will have to inform investors with all revenues returned to the fund, net of operating costs, with guidelines stipulating that any securities lending agreement must ensure that they can be recalled at any time or agreement terminated.

Ucits funds receiving collateral to mitigate counterparty risk from OTC financial derivative transactions will need to ensure that collateral complies with qualitative criteria and limits relating to diversification.

Funds investing in financial indices will have to ensure investors are provided with the full calculation methodology of financial indices, which must respect rebalancing and diversification criteria.


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