Today (13/02/2017) , the Commission des Surveillance du Secteur Financier (CSSF) published a press release to confirm that it expects all Luxembourg UCITS to comply with ESMA’s opinion on UCITS share classes (the Opinion).
Share classes that are not compliant with the Opinion, but established prior to 30 January 2017 should be closed for subscription by new investors by 30 July 2017 at the latest, and for additional investment by existing investors by 30 July 2018 at the latest.
New share classes of UCITS need to comply with the Opinion from their inception.
The Opinion was issued on 30 January 2017 and lays down both high level principles to be complied with when setting up different classes of shares within a UCITS or any compartment thereof and provides for transitional provisions.
I. High level principles
They related to Common Investment Objective (A), Non-contagion (B), Predetermination (C) and Transparency (D).
A. Common Investment Objective
ESMA is of the view that share classes of the same fund/sub-fund should have a common investment objective reflected by a common pool of assets. Currency risk hedging at the level of a share class remains acceptable.
ESMA considers that any additional risk introduced to the fund through the use of a derivative overlay for a given share class consists in asserting that this risk should be mitigated and monitored appropriately and only be borne by the investors in the respective share class. For that sake and with a view to ensuring that the derivative overlay used for the purpose of hedging the currency risk does not lead to spill-over risk, in particular the following principles should be observed:
1. The UCITS Management Company must ensure that the exposure to any counterparty of a derivative transaction is in line with the limits laid down in Article 52 of the UCITS Directive in respect to the net asset value of the share class;
2. The notional of the relevant derivative should not lead to a payment or delivery obligation with a value exceeding that of the share class;
3. The UCITS management company should put in place a level of operational and accounting segregation; and
4. The UCITS management company should implement stress tests to quantify the impact of losses on all investor classes.
As a share class in which the risk to be hedged is at the discretion of the management company could lead to a situation where it was unclear to other investors which specific risk was being hedged, ESMA is also of the view that all features of a share class should be pre-determined before the share class is launched.
The following operational principles should be observed:
• The information about existing share classes should be provided in the prospectus as part of the details of the types and main characteristics of the units;
• In regard to the share classes with a contagion risk, the UCITS management company should provide a list of share classes in the form of readily available information which should be kept up-to-date; and
• The stress test results should be made available to national competent authorities on request.
The Opinion has an impact on the launch of new share classes and on the existing share classes (see above).
In particular transactions under ISDA agreements relating to hedging and/or their credits support documentation may need to be reviewed.