ESMA updates its Q&As on the UCITS Directive

On 17 December 2021, ESMA published an updated version of its Q&A on the Application of the UCITS Directive including new questions on issuer concentration.

The new questions include:

• How securities issued by certain issuers (such as sovereign issuers) under Article 54(1) of the UCITS Directive are treated.
• Where a UCITS has a hedged share class in a different currency, whether unrealised foreign exchange profits and losses should be counted towards the net asset value (NAV) of the hedged share class and be taken into account when calculating the counterparty risk limit under Article 52(1) of the UCITS Directive.

On the questions related to Issuer Concentration; The Commission was asked whether:

• the 40% limit set out in Article 52(2) of the UCITS Directive apply to index-tracking UCITS that are subject to Article 53 of the UCITS Directive; and
• whether netting and hedging arrangements should be taken into account for the purposes of calculating issuer concentration limits pursuant to Article 52 of the UCITS Directive?

The Commission confirmed that the 40% limit set out in Article 52(2) does not apply to index-tracking UCITS that comply with the requirements set out in Article 53 and that “only netting arrangements in accordance with the definition and conditions set out in the guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS may be taken into account when calculating issuer concentration limits.”

Further Q&As were added relating to the application of Article 54 with the Commission confirming that UCITS cannot invest up to 100% of their assets in transferable securities or money markets instruments that are not issued nor guaranteed by a Member State, one or more of its local authorities, a third country or a public international body to which one or more Member States belong and that if a UCITS holds more than six issues in transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country or a public international body to which one or more Member States belong, all the issues should respect the 30% limit.

Finally, the Commission confirmed that FX forward are OTC instruments, meaning that when UCITS invest in these types of instruments for currency hedging purposes in a share class they should comply with the counterparty risks limits laid down in Article 52(1) of the UCITS Directive in respect to the NAV of the share class and unrealised FX profits and losses should be counted towards the NAV of the hedged share class of the UCITS and taken into account when calculating the counterparty risk limits.

On the question relating to advance notice for the marketing of new share classes of UCITS notified for cross-border marketing; The Commission confirmed that if a UCITS intends to market a new share class in a Member State where it has already been notified for marketing, the UCITS should give written notice to the competent authorities of both the UCITS home and host Member State, at least one month before the marketing of the new share class starts.