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  • Matheson Update: Central Bank of Ireland Publishes UCITS Regulations

    On 5 October 2015, the Central Bank of Ireland (the Central Bank) published new regulations

    setting out the Central Bank requirements applicable to undertakings for collective investment in

    transferable securities (UCITS). The Central Bank (Supervision and Enforcement) Act 2013 (Section

    48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the CB

    UCITS Regulations) supplement existing legislative requirements (in particular, the European

    Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011)

    and, together with guidance published on the Central Bank website and the UCITS Q&A, replace the

    rules and guidance previously set out in the Central Banks UCITS Notices and Guidance Notes. The

    publication of the CB UCITS Regulations follows a consultation issued by the Central Bank in January

    2014 and is accompanied by a feedback statement summarising the responses received.

    Background

    Following the introduction of the AIF Rulebook as part of the implementation of the Alternative

    Investment Fund Managers Directive (AIFMD), the Central Bank indicated that it would adopt a

    similar approach in respect of UCITS and would consolidate into one document all of the conditions

    which the Central Bank imposes on UCITS, their management companies and depositaries. The

    Central Bank consulted on this proposal in its Consultation on Publication of UCITS Rulebook

    (CP77) which outlined the Central Banks approach, included a draft of the new proposed UCITS

    Rulebook, and raised specific queries in relation to proposals regarding the promoter regime, Central

    Bank approval of regulated markets and semi-annual reporting for UCITS management companies.

    The Central Bank has decided to publish the requirements applicable to UCITS in the form of a

    statutory instrument rather than a UCITS Rulebook under relatively new regulation-making powers

    conferred on the Central Bank by the Central Bank Supervision and Enforcement Act 2013. This new

    procedure has been adopted for implementation of regulation in other financial sectors and the Central

    Bank has indicated that using regulations is its preferred approach, as it is intended to assist fund

    providers by bringing additional clarity and certainty to the rules applied by the Central Bank. The

    Central Bank has indicated that it will shortly commence a review of the Central Banks AIF Rulebook

    to see whether it should also be issued as Central Bank regulations.

    Amendments to Central Bank Conditions

    The CB UCITS Regulations introduce a number of amendments to the conditions previously set out in

    the UCITS Notices. The key changes are as follows:

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    Codification of Existing Derogations

    One of the most significant changes effected by the CB UCITS Regulations is the codification of any

    derogations previously granted by the Central Bank in relation to individual requirements. The Central

    Bank believes that its review process has allowed it to identify any such derogations and to ensure

    that they are included. If a particular derogation has not been included in the CB UCITS Regulations,

    the relevant UCITS will need to re-apply for such derogation. The Central Bank has emphasised on a

    number of occasions that it retains the authority to grant derogations from the provisions of the CB

    UCITS Regulations.

    While the Central Bank has endeavoured to ensure that all existing derogations are provided for in the

    CB UCITS Regulations, each UCITS will now need to consider its current offering documents and

    operating procedures, together with its authorisation file, in order to determine whether any

    derogations were obtained which are not provided for in the CB UCITS Regulations and to re-apply for

    such derogation if necessary. Matheson are of course happy to assist our clients with this analysis

    and any such applications.

    Removal of Promoter Approval Requirement

    Following the approach adopted in respect of alternative investment funds in the AIF Rulebook, the

    requirement for UCITS to have approved promoters has been removed. The Central Bank will instead

    place reliance on the regulatory regimes for UCITS management companies and it has elaborated on

    the obligations of directors in circumstances where a UCITS gets into difficulties. This is a welcome

    development and follows the approach adopted by the Central Bank in implementing the AIFMD.

    Guidance on Regulated Markets

    The Central Bank has withdrawn Guidance Note 1/96, which set out its approach to the determination

    of whether a market met the criteria for regulated markets upon which transferable securities or

    financial derivative instruments must be listed or traded in order to be an eligible investment for a

    UCITS. This withdrawal is on the basis that there is a degree of overlap between that guidance note

    and the UCITS eligible assets directive. The Central Bank will no longer review submissions on

    proposed regulated markets and will no longer publish a list of permitted markets for UCITS. It will

    therefore be for the UCITS to determine whether a particular market meets the relevant criteria set out

    in the CB UCITS Regulations, which may provide additional flexibility to UCITS.

    Financial Reporting Requirements

    The Central Bank has extended the financial reporting requirements by requiring UCITS management

    companies and depositaries to submit half-yearly management accounts covering the second six

    months of the financial year (in addition to the requirement to submit half yearly management

    accounts covering the first six months of the financial year, as applied to date). The Central Bank is of

    the view that this change will provide it with more complete and timely information, allowing it to

    compare and analyse reports from the first six months of the year with the second six months and

    providing more timely key risk indicators and alerts on PRISM, the Central Banks risk-based

    framework for the supervision of regulated firms.

    Collateral Diversification

    The CB UCITS Regulations contain provisions which reflect the outcome of the Central Banks July

    2014 consultation on the adoption of the European Securities and Markets Authority (ESMA) revised

    guidelines on ETFs and other UCITS issues (CP84). ESMAs revised guidelines provide for a

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    derogation from the collateral diversification requirement where collateral consists of securities issued

    or guaranteed by a member state, one or more of its local authorities, a third country or public

    international body to which one or more member states belong. The derogation applies to all UCITS,

    subject to additional disclosure requirements applicable to the prospectus and periodic reports of

    UCITS who avail of the derogation.

    The CB UCITS Regulations include provisions designed to mitigate the risks the Central Bank

    perceives in applying the derogation to all UCITS and builds upon the existing obligation on UCITS

    management companies to perform a credit assessment set out in the European Communities

    (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 by identifying a

    specific credit quality threshold.

    The CB UCITS Regulations provide that collateral received should be of high quality. In assessing

    whether collateral is of high quality, the UCITS management company must ensure that, where the

    issuer was subject to a credit rating by an agency registered and supervised by ESMA, that rating

    must be taken into account. Where an issuer is downgraded below the two highest short-term credit

    ratings by the credit rating agency, the management company must conduct a new credit assessment

    of the issuer without delay. This revised rule is based on the formulation set out in ESMAs opinion on

    the review of the ESMA guidelines on a common definition of money market funds, meaning that the

    threshold applied by a UCITS in its credit assessment of collateral issuers is the standard which

    applies to investments by a UCITS MMF.

    Further guidance in relation to the matters which should be taken into consideration in a credit

    assessment process and also practice which should be followed when there is a deterioration in credit

    quality have been incorporated in the UCITS guidance published on the Central Banks website.

    US OTC Derivative Counterparties

    The UCITS Notices set out a list of entities which are eligible to act as counterparties to a UCITS in

    OTC derivative trades. This list includes credit institutions and MiFID firms and goes on to capture

    any US entities by referring to an entity subject to regulation as a Consolidated Supervised Entity

    (CSE) by the Securities and Exchange Commission in the US. However, due to changes in the US

    regulatory framework, the CSE test has become inapplicable to broker-dealers in the US.

    Accordingly, during the consultation period, industry engaged with the Central Bank to amend this list.

    The CB UCITS Regulations refers, in addition to credit institutions and MiFID firms, to a group

    company of an entity issued with a bank holding licence from the Federal Reserve, where that group

    company is subject to consolidated supervision by the Federal Reserve.

    The CB UCITS Regulations address the status of clearing houses, where central clearing is mandated

    under the European Market

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