On December 8th 2015, the CSSF published the first version of Frequently Asked Questions (“FAQs”) concerning the Luxembourg Law of December 17th 2010 relating to undertakings for collective investment (the “UCI Law”).

"The aim of the FAQs is to highlight some of the key aspects of the laws and regulations governing undertakings of collective investments in transferable securities (“UCITS”) from a Luxembourg perspective."

The first section of the FAQs refers to the eligibility of assets for UCITS while the second section refers to diversification rules applied to UCITS.

Section 1- Eligibility of assests for UCITS

As confirmed in the FAQs, target UCITS are eligible investments for UCITS if such target UCITS do not themselves invest more than 10% in aggregate of their net assets in units of UCITS or other UCIs as foreseen under article 41 (1) e) 4th indent of the UCI Law.

The FAQs also include a chart, which explains the steps to be considered in determining if the investment in another UCIs is eligible for UCITS, taking into consideration whether such UCIs are closed-ended or open-ended, regulated or not, as well as their origin.

It is worth noting that open-ended SIFs and SICARs, which are AIFs, and Part II UCIs are eligible investments for UCITS within the 30% limit of article 46(2) of the UCI Law provided that such SIFs, SICARs and Part II UCIs comply with the requirements of article 2(2) and 41 (1) e) of the UCI Law. The same applies to regulated open-ended UCIs from other EEA states and third countries.

With respect to non-UCITS ETFs, they qualify as eligible investments as long as they comply with the requirements of article 2(2) and 41 (1) e) of the UCI Law, notwithstanding that their offering documents grant possibilities which are not equivalent to requirements applicable to UCITS. However, UCITS investing in such ETFs must continuously ensure that the investment rules applied at ETF level are equivalent to the investment rules applicable to UCITS. This can be done via a system of compliance control or a written confirmation of the ETF or its manager.

Regarding the eligibility of structured financial instruments, the FAQs describe the analysis that shall be performed in order to assess whether such instruments comply with the investment policy of UCITS.

Moreover, the CSSF confirms that the OTC bond markets such as the US OTC Fixed Income Bond Market, the Hong Kong OTC Corporate Bond Market and the China Interbank Bond Market and the OTC bond market organized by the International Capital Market Association (ICMA) are eligible markets for UCITS.

In addition, the FAQs clarify that the 10% limit of article 41 (2) of the UCI Law (“trash ratio”) may include only investments in transferable securities and money market instruments other than those referred to in article 41 (1) a) to d) and h) of the UCI Law.

The FAQs further indicate the applicable provisions in order for a financial index to qualify as a financial index under article 41 (1) g) of the UCI Law.

Section 2 - Diversification rules applied to UCITS

The CSSF now clarifies that the holding limits applicable to UCITS under article 48 (2) of the UCI Law shall apply at a sub-fund level and not at the level of the umbrella. This clarification will certainly be welcomed by fund actors as there has been a long lasting uncertainty on this subject.