ESMA Opinion on UCITS share classes
1 February 2017
Regulatory News Alert
Following the last consultation paper on UCITS share classes published in April 2016, ESMA introduced on 30 January 2017 an Opinion paper on this topic with an applicable framework for UCITS share classes.
This Opinion states high-level guidelines and new operational principles on the following:
1. Common investment objective
- Hedging arrangements at share class level are not compatible with the requirement for a fund to have a common investment objective with the exception of currency risk hedging.
- Costs and materialization of risks generated by the currency hedging should be monitored and only be allocated to the relative hedged share classes,
- A set of operational rules should apply:
- Accounting segregation should be operationally in place to allocate the hedging contracts and their P&L for each NAV;
- The UCITS management company should implement stress tests to quantify the impact of losses on all investor classes of a fund that are due to losses relating to share class-specific assets that exceed the value of the respective share class;
- The UCITS management company should monitor that hedging positions are at all time be within 95% of the portion of the NAV to hedge and 105% of the net asset value of the share class; and
- Hedging positions should be rebalanced at least monthly.
3. Pre-determination for all features of share classes
- All features of a share class should be pre-determined before the share class is set up. This will help investors gain a full overview on the rights and/or features attributed to his investment.
- The information about existing share classes should be provided via the fund 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 current;
- The stress test results should be made available to national competent authorities on request.
With this paper, ESMA excludes duration, volatility and generally, all non-currency risk related hedging at share class level, as they might prove difficult to make compliant with the principles above.
By allowing a lower threshold of 95% of the portion of the NAV to be hedged, look-through currency hedging and benchmark currency hedging at share class level will still be allowed.
Even though UCITS management companies will need to implement a monitoring of the share class hedging , the Opinion does not limit the type of instruments to be used for the currency hedging.
The timeline for non-compliant existing share classes is set as per below:
- All share classes established before the publication of this paper that do not comply with the principles laid out should be closed to new investors as of the 30/07/2017.
- All share classes established before the publication of this paper that do not comply with the principles laid out should be closed to additional investment by existing investors by 30/07/2018.