S.I. No. 420/2015 - Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015

ARRANGEMENT OF REGULATIONS

PART 1 PRELIMINARY AND GENERAL

1.

2.

PART 2 RESTRICTIONS ON UCITS

Chapter 1 General

3.

4.

5.

6.

7.

8.

9.

Chapter 2 Investment Restrictions

10.

11.

12.

13.

14.

Chapter 3 Financial Derivative Instruments

15.

16.

17.

18.

19.

20.

21.

22.

Chapter 4 Efficient Portfolio Management

23.

24.

25.

Chapter 5 Share Classes

26.

Chapter 6 Constitutional Documents

27.

28.

29.

30.

31.

32.

Chapter 7 Dealing

33.

Chapter 8 Valuation

34.

35.

36.

37.

38.

Chapter 9 Remuneration

39.

Chapter 10 Transactions involving Connected Persons

40.

41.

Chapter 11 Directed Brokerage Services

42.

43.

PART 3 SUPERVISORY REQUIREMENTS

44.

45.

46.

47.

48.

49.

PART 4 PROSPECTUS REQUIREMENTS

50.

51.

52.

53.

54.

55.

56.

57.

58.

59.

60.

61.

62.

63.

64.

65.

66.

67.

68.

69.

70.

71.

PART 5 KEY INVESTOR INFORMATION DOCUMENT

72.

73.

74.

75.

PART 6 GENERAL OPERATIONAL REQUIREMENTS

76.

77.

PART 7 ANNUAL AND HALF-YEARLY REPORTS OF A UCITS

78.

79.

80.

PART 8 REQUIREMENTS IN RESPECT OF SPECIFIC TYPES OF UCITS

81.

82.

83.

84.

85.

86.

87.

88.

89.

PART 9 GUARANTEED UCITS

90.

91.

92.

PART 10 CROSS-BORDER NOTIFICATION OF UCITS

93.

94.

PART 11 MANAGEMENT COMPANIES

Chapter 1 General Requirements

95.

96.

97.

98.

99.

100.

101.

102.

103.

104.

105.

Chapter 2 Management company Passport

106.

107.

108.

109.

110.

PART 12 UCITS DEPOSITARIES

111.

112.

113.

114.

115.

116.

117.

118.

119.

120.

PART 13 MISCELLANEOUS PROVISIONS

121.

122.

123.

124.

SCHEDULE 1 Regulatory Criteria

SCHEDULE 2 Netting and Hedging

SCHEDULE 3 Conditions for Collateral Received by a UCITS

SCHEDULE 4 Calculation of Global Exposure using the Value at Risk Approach

SCHEDULE 5 Methods of Valuation

SCHEDULE 6 Advertising Standards for Certain UCITS

SCHEDULE 7 Additional information to be included in the annual report

SCHEDULE 8 Additional information to be included in the half-yearly report

SCHEDULE 9 Minimum Capital Requirement Report

SCHEDULE 10 Managerial functions of the management company

SCHEDULE 11 Records of a Management company

S.I. No. 420 of 2015

CENTRAL BANK (SUPERVISION AND ENFORCEMENT) ACT 2013 (SECTION 48(1)) (UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES) REGULATIONS 2015

Notice of the making of this Statutory Instrument was published in

“Iris Oifigiúil” of 6th October, 2015.

In exercise of the powers conferred on the Central Bank of Ireland (the“Bank”) by section 48 of the Central Bank (Supervision and Enforcement) Act 2013 (the “Act”), the Bank, having consulted with the Minister for Finance and the Minister for Enterprise, Jobs and Innovation in accordance with section 49(1) of the Act hereby makes the following regulations:

PART 1 PRELIMINARY AND GENERAL

Citation and commencement

(2)(a) Subject to paragraph (b), these Regulations commence on 1 November 2015.

• (b) In relation to UCITS authorised by the Bank prior to the date of commencement of these Regulations, as referred to in paragraph (a), Regulation 33(3) of these Regulations shall commence on 1 November 2016.

Interpretation

“actively managed UCITS ETF” means a UCITS ETF, in respect of which the responsible person has discretion over the composition of its portfolio and which, subject to the stated investment objectives and policies, may have the objective of outperforming an index;

“alternative investment fund” has the meaning given to the term in Regulation 5(1) of the European Union (Alternative Investment Fund Managers) Regulations 2013 ( S.I. No. 257 of 2013 );

“AIF” means an alternative investment fund;

“annual tracking difference” means the difference between the annual return of an index-tracking UCITS and the annual return of the tracked index;

“anti-dilution levy” means a charge imposed on subscriptions or on redemptions as relevant, to offset the dealing costs of buying or selling assets of the UCITS, as a result of net subscriptions or of net redemptions on a dealing day;

“associated company” has the meaning given to the term in schedule 4, paragraph 20 of the Companies Act 2014 (No. 38 of 2014);

“central counterparty” means a person specified in Regulation 8(5);

“constitutional document” means:

• (a) in the case of a unit trust, the trust deed,

• (b) in the case of an investment company, the memorandum and articles of association,

• (c) in the case of a common contractual fund, the deed of constitution; and

• (d) in the case of an Irish Collective Asset-management Vehicle, the instrument of incorporation.

“directed brokerage services” means brokerage services in relation to a UCITS pursuant to which a commission or similar payment is paid to or secured by the entity which issues instructions;

“EMIR” means Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories;

“ESMA” means the European Securities and Markets Authority;

“FDI” means a financial derivative instrument;

“financial resources” has the meaning given to the term in Schedule 9;

“group undertaking” means an undertaking that is included in the same group for the purposes of preparing consolidated accounts, in accordance with Directive 2013/34/EU or in accordance with recognised international accounting rules;

“index-tracking UCITS” means a UCITS the strategy of which is to replicate (by any means including physical or synthetic replication) or track the performance of an index or indices;

“index-tracking leveraged UCITS” means a UCITS the strategy of which is to have a leveraged exposure to an index or exposure to a leveraged index;

“indicative net asset value” means a measure of the intraday value of the net asset value of a UCITS ETF based on the most up-to-date information. For the avoidance of doubt the indicative net asset value is not necessarily the value at which investors on the secondary market purchase and sell their units;

“investment adviser” means a firm appointed by:

• (a) a responsible person, or

• (b) an investment manager (including any sub investment manager),

to provide investment advice in respect of some or all of the assets of a UCITS and which does not have any discretionary powers over any of the assets of that UCITS;

“investment fund” means a UCITS or an AIF;

“investment manager” means a firm appointed by a responsible person to manage some or all of the assests of a UCITS on a discretionary basis and shall include any sub investment manager appointed by an investment manager;

“KIID” means a key investor information document of a UCITS;

“legal maturity” means the date when the principal of a security is to be repaid in full and which is not subject to any optionality;

“management company” has the meaning given to the term in the UCITS Regulations, with the exception of Part 11 where the term refers exclusively to a management company for which the Bank is the management company’s home Member State;

“minimum capital requirement report” means a report prepared in accordance with Regulation 95;

“multilateral trading facility” has the meaning given to the term in Article 4 of MiFID;

“resident in the State” means a person who is present in the State for the whole of 110 business days per year;

“regulatory criteria” means those non-exhaustive considerations in respect of a regulated market, including those set out in Schedule 1, to which the responsible person shall have regard when assessing the eligibility of a market for investment;

“responsible person” means a management company, where one has been designated to act in respect of a particular UCITS and in the absence of any such designation, the UCITS itself. In the case of Regulation 47, the responsible person means the UCITS investment company where the designated management company is being replaced;

“SEC” means the Securities and Exchange Commission of the United States of America;

“soft commission” means an agreement or other arrangement under which an entity receives goods or services in return for which it agrees to direct, or in fact directs, business through or to another person or otherwise confers an economic advantage on that other person;

“tracking error” means the volatility of the difference between the return of the index-tracking UCITS and the return of the index or indices that is or are tracked;

“UCITS ETF” means a UCITS at least one unit or share class of which is traded throughout the day on at least one regulated market or multilateral trading facility with at least one market maker which takes action to ensure that the stock exchange value of its units does not vary significantly from its net asset value and where applicable from its indicative net asset value;

“UCITS Regulations” means European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 ( S.I. No. 352 of 2011 ) (as amended);

“umbrella UCITS” means a UCITS which has one or more sub-funds;

“valuation policy” has the meaning given to that term by Regulation 34;

“weighted average life” (“WAL”) means the average length of time to the legal maturity of all the underlying assets in the UCITS reflecting the relative holdings in each asset;

“weighted average maturity” (“WAM”) means the average length of time to maturity or, if shorter, to the next interest rate reset to a money market rate, of all the underlying assets in the UCITS reflecting the relative holding in each case.

• (2) For the purposes of these Regulations, in particular Part 2, Chapter 2 of these Regulations, any investment restrictions (which are applicable to particular types of assets invested in by a UCITS) or borrowing restrictions (which are applicable to borrowing by a UCITS) apply to the net asset value of the UCITS and to each sub- fund of an umbrella fund as if each sub-fund was a separate UCITS.

• (3) A word or expression used in these Regulations and also used in the UCITS Regulations or the description or explanation of a matter set out in the UCITS Regulations and referred to in these Regulations has, unless the contrary intention appears, the same meaning (description or explanation) in these Regulations that it has in the UCITS Regulations.

PART 2 RESTRICTIONS ON UCITS

Chapter 1 General

General restrictions

Eligible assets: transferable securities

• (2) For the purpose of ensuring the ability of the UCITS to comply with Regulation 104(1) of the UCITS Regulations, a responsible person shall:

• (a) assess (and document this assessment in writing) its liquidity risk, where information is available to the responsible person that would lead it to determine that investment by the UCITS in a transferable security could compromise the ability of the UCITS to comply with Regulation 104(1) of the UCITS Regulations;

• (b) assess (and document this assessment in writing), by reference to the factors specified in this sub-paragraph at a minimum, the liquidity risk of a transferable security when investing in any transferable security:

• (i) the volume of and turnover in the transferable security;

• (ii) if price is determined by supply and demand in the market, the issue size and the portion of the issue that the investment manager plans to buy;

• (iii) the opportunity and timeframe to buy or sell the transferable security;

• (iv) an assessment of the quality of secondary market activity in the transferable security and an analysis of the quality and number of intermediaries and market makers dealing in the transferable security concerned;

• (c) assess (and document this assessment in writing):

• (i) the liquidity of transferable securities; and

• (ii) the negotiability of transferable securities held in the portfolio;

where such transferable securities are not admitted to trading on a regulated market as defined in Regulation 68(1)(a) to (d) of the UCITS Regulations, in order to ensure compliance with Regulation 104(1) of the UCITS Regulations.

Closed-ended funds

Money-market instruments

• (a) assessed the liquidity of that money-market instrument;

• (b) retained written records of that assessment.

• (2) In assessing the liquidity of a money-market instrument for the purpose of sub-paragraph (1)(a), the responsible person shall take the following factors into account:

• (a) in respect of the particular money-market instrument:

• (i) the frequency of trades and quotes for the instrument;

• (ii) the number of dealers who are willing to purchase and sell the instrument;

• (iii) the willingness of the relevant dealers to make a market in the relevant instrument;

• (iv) the nature of market place trades;

• (v) the size of the particular issuance or programme; and

• (vi) the possibility to repurchase, redeem or sell the relevant instrument in a short period and whether such repurchase, redemption or sale can be achieved at limited cost in terms of fees and bid/offer prices and with very short settlement delay; and

• (b) in respect of the UCITS:

• (i) unit-holder structure and the concentration of unit-holders of the UCITS;

• (ii) the purpose of funding of unit-holders;

• (iii) the quality of information on the cash flow patterns of the UCITS; and

• (iv) the prospectus’s guidelines of the UCITS on limiting withdrawals.

• (3) Where a responsible person considers that an amortization method can be used to assess the value of a money-market instrument it shall ensure that this method will not result in a material discrepancy between the value of the money-market instrument and the value calculated according to the amortization method as set out in Regulation 88.

• (4) Where the presumption of liquidity and accurate valuation provided for in paragraph 5 of Schedule 3 of the UCITS Regulations cannot be relied upon, the money-market instrument shall be subject to an appropriate assessment by the responsible person.

• (5) A responsible person must be able to demonstrate that it has assessed liquidity for all money-market instruments which are traded on a regulated market but for which the responsible person was not able to rely on a presumption of liquidity.

Deposits with credit institutions

• (a) a credit institution authorised in the EEA;

• (b) a credit institution authorised within a signatory state, other than a Member State of the EEA, to the Basle Capital Convergence Agreement of July 1988; or

• (c) a credit institution authorised in Jersey, Guernsey, the Isle of Man, Australia or New Zealand.

Financial derivative instruments

• (a) the FDI does not expose the UCITS to risks which the UCITS could not otherwise assume;

• (b) the FDI does not cause the UCITS to diverge from its investment objectives disclosed in its prospectus; and

• (c) the FDI is dealt in on a regulated market or alternatively the conditions in paragraph (3) are satisfied.

• (2) Where a responsible person enters, on behalf of a UCITS, into a total return swap or invests in other FDIs with similar characteristics, the assets held by the UCITS shall comply with Regulations 70, 71, 72, 73 and 74 of the UCITS Regulations.

• (3) A responsible person shall only invest assets of the UCITS in an OTC derivative if the derivative counterparty is within at least one of the following categories:

• (a) a credit institution that is within any of the categories set out in Regulation 7;

• (b) an investment firm authorised in accordance with MiFID; or

• (c) a group company of an entity issued with a bank holding company licence from the Federal Reserve of the United States of America where that group company is subject to bank holding company consolidated supervision by that Federal Reserve.

• (4) Where a counterparty within subparagraphs (b) or (c) of paragraph (3):

• (a) was subject to a credit rating by an agency registered and supervised by ESMA that rating shall be taken into account by the responsible person in the credit assessment process; and

• (b) where a counterparty is downgraded to A-2 or below (or comparable rating) by the credit rating agency refered to in subparagraph (a) this shall result in a new credit assessment being conducted of the counterparty by the responsible person without delay.

• (5) Where an OTC derivative referred to in subparagraphs (a), (b) and (c) of paragraph (3) is subject to a novation, the counterparty after the novation must be:

• (a) an entity that is within any of the categories set out in subparagraphs (a), (b) and (c) of paragraph (3); or

• (b) a central counterparty that is:

• (i) authorised or recognised under EMIR; or

• (ii) pending recognition by ESMA under Article 25 of EMIR, an entity classified:

• (I) by the SEC as a clearing agency; or

• (II) by the Commodity Futures Trading Commission of the United States of America as a derivatives clearing organisation.

(6)(a) Risk exposure to the counterparty shall not exceed the limits set out in Regulation 70(1)(c) of the UCITS Regulations, assessed in accordance with subparagraph (b).

• (b) In assessing risk exposure to the counterparty to an OTC derivative for the purpose of Regulation 70(1)(c) of the UCITS Regulations:

• (i) a responsible person shall calculate the exposure to the counterparty using the positive mark-to-market value of the OTC derivative with that counterparty;

• (ii) a responsible person may net derivative positions with the same counterparty, provided that the UCITS is able to legally enforce netting arrangements with the counterparty. For this purpose netting is permissible only in respect of OTC derivatives with the same counterparty and not in relation to any other exposures the UCITS has with the same counterparty;

• (iii) a responsible person may take account of collateral received by the UCITS in order to reduce the exposure to the counterparty, provided that the collateral meets with the requirements specified in paragraphs (3), (4), (5), (6), (7), (8), (9) and (10) of Regulation 24.

Financial Index

• (a) an index should have a clear, single objective in order to represent an adequate benchmark for the market;

• (b) the universe of the index components and the basis on which these components are selected for the strategy should be clear to investors and competent authorities; and

• (c) if cash management is included as part of the index strategy, the responsible person must be able to demonstrate that this cash management does not affect the objective nature of the index calculation methodology.

• (2) If a financial index has been created and calculated on the request of a single market participant, or of a very limited number of market participants, and according to the specifications of that market participant or those market participants, it shall not constitute an adequate benchmark of the market to which it refers.

• (3) A responsible person shall ensure that a due diligence exercise on the quality of the financial index is carried out and documented, prior to investment of the assets of the UCITS in the index, and on an on-going basis, considering matters including:

• (a) whether the index methodology contains an adequate explanation of the weightings and classification of the components on the basis of the investment strategy;

• (b) whether the index represents an adequate benchmark;

• (c) matters relating to the index components; and

• (d) an assessment of the availability of information on the index, including:

• (i) whether there is a clear narrative description of the benchmark;

• (ii) whether there is an independent audit and the scope of such an audit; and

• (iii) the frequency with which the index is published and whether this will affect the ability of the UCITS to calculate its net asset value.

• (4) A responsible person shall not invest assets of the UCITS in a financial index where a single component’s impact on the overall return of that index exceeds the diversification requirements set out in Regulation 71 of the UCITS Regulations.

• (5) A responsible person shall not invest assets of the UCITS in a leveraged financial index where a single component’s impact on the overall return of that index, taking into account the leverage, exceeds the diversification requirements set out in Regulation 71 of the UCITS Regulations.

• (6) A responsible person shall not invest assets of the UCITS in a financial index:

• (a) that rebalances on an intraday or daily basis, or the rebalancing frequency of which prevents investors from being able to replicate the financial index;

• (b) in respect of which the index provider does not disclose, in a manner that is easily accessible by and free of charge to investors and prospective investors, the information prescribed in paragraph (7) on the full calculation methodology sufficient to enable investors to replicate the financial index; or

• (c) information on the performance of which is not freely available to investors.

• (7) The information on the full calculation methodology that must be disclosed shall include:

• (a) index constituents;

• (b) index calculation (including the effect of leverage within the index);

• (c) re-balancing methodologies;

• (d) index changes;

• (e) information on any operational difficulties in providing timely or accurate information; and

• (f) important parameters or elements to be taken into account by investors to replicate the financial index.

• (8) A responsible person shall only invest assets of the UCITS in a financial index if that index complies with the conditions set out in paragraph (9).

(9)(a) The conditions to which paragraph (8) refers are that:

• (i) the financial index publishes, in a manner that is easily accessible by and free of charge to investors and prospective investors, its constituents together with, in accordance with subparagraph (b), their respective weightings;

• (ii) the methodology for the selection and the rebalancing of the components of the financial index is based on a set of pre-determined rules and objective criteria;

• (iii) the index-provider does not accept payments from potential index components for inclusion in the index;

• (iv) the methodology of the financial index does not permit retrospective changes to previously published index values; and

• (v) the financial index is subject to independent valuation.

• (b) The requirements to which subparagraph (a)(i) refers are that:

• (i) weightings are published after each re-balancing which publication may be on a retrospective basis; and

• (ii) the information on the constituents of the financial index and their respective weightings shall:

• (I) cover the previous period since the last rebalancing; and

• (II) include all levels of the index.

• (10) A responsible person shall only invest assets of the UCITS in a commodity index if the conditions specified in paragraph (11) are satisfied in respect of that investment in that commodity index.

• (11) The conditions to which paragraph (10) refers are that:

• (a) the relevant commodity index is comprised of different commodities; and

• (b) sub-categories of a commodity shall be regarded as being the same commodity for the calculation of the diversification limits set out in Regulation 71 of the UCITS Regulations if those sub-categories are highly correlated within the meaning of paragraph (12).

• (12) For the purposes of paragraph (11) two components of a commodity index that are sub-categories of the same commodity are highly correlated if 75 per cent of the correlation observations are above 0.8, where correlation observations are calculated as follows:

• (a) on the basis of equally-weighted daily returns of the corresponding commodity prices, and

• (b) from a 250-day rolling time window over a five-year period.

Chapter 2 Investment Restrictions

Investment funds

• (2) Where a responsible person invests the assets of a sub-fund within an umbrella UCITS in the units of another sub-fund within that umbrella UCITS, that investment is subject to the requirements in paragraph (3), in addition to the provisions of paragraph (1).

• (3) The requirements for the purposes of paragraph (2) are:

• (a) the investment shall not be made in a sub-fund which itself holds units in any other sub-fund within the umbrella UCITS; and

• (b) where a responsible person, on behalf of a sub-fund (the “Investing Fund”) of an umbrella UCITS invests in the units of other sub-funds of that umbrella (each a “Receiving Fund”), the rate of the annual management fee which investors in the Investing Fund are charged in respect of that portion of the Investing Fund’s assets invested in Receiving Funds (whether such fee is paid directly at the Investing Fund level, indirectly at the level of the Receiving Funds or a combination of both) shall not exceed the rate of the maximum annual management fee which investors in the Investing Fund may be charged in respect of the balance of the Investing Fund’s assets, such that there shall be no double charging of the annual management fee to the Investing Fund as a result of its investments in the Receiving Fund. This provision is also applicable to the annual fee charged by an investment manager where this fee is paid directly out of the assets of the UCITS.

• (4) Where a responsible person proposes that a sub-fund within an umbrella UCITS will invest in the units of another sub-fund within that umbrella by way of transfer for consideration, that responsible person shall, in writing, notify the Bank of that proposal and of the rationale for the proposed investment, in advance of the proposed date of investment.

Deposits

(a)10 per cent of net assets of the UCITS; or

• (b) where the deposit is made with the depositary, 20 per cent of net assets of the UCITS.

• (2) For the purposes of paragraph (1), credit institutions which are group companies shall be regarded as a single credit institution for the purpose of calculating the limits contained in this Regulation.

Recently issued transferable securities

• (2) Paragraph (1) does not apply to investment by a responsible person in US securities known as “Rule 144A securities” provided that:

• (a) the relevant securities have been issued with an undertaking to register the securities with the SEC within one year of issue; and

• (b) the securities can be realised by the UCITS within seven days at the price, or approximately at the price, at which they are valued by the UCITS.

Financial derivative instruments

• (a) include any net exposure to a counterparty generated through a securities lending or repurchase agreement, where net exposure means the amount receivable by a UCITS less any collateral provided by the UCITS;

• (b) include exposures created through the reinvestment of collateral; and

• (c) establish whether the exposure of the UCITS is to an OTC counterparty, a broker, a central counterparty or a clearing house.

• (2) The position exposure of a UCITS, if any, to the underlying assets of an FDI, including an FDI that is embedded in transferable securities, money-market instruments or investment funds, when combined with positions resulting from direct investments:

• (a) shall be calculated in accordance with paragraph (3); and

• (b) shall not exceed the investment limits set out in Regulations 70 and 73 of the UCITS Regulations.

• (3) For the purposes of paragraph (2):

• (a) when calculating issuer-concentration risk, the FDI (including embedded FDI) must be looked through in determining the resultant position exposure and this position exposure shall be taken into account in the issuer concentration calculations;

• (b) a responsible person shall calculate the position exposure of the UCITS using the commitment approach or the maximum potential loss as a result of default by the issuer approach, whichever is greater; and

• (c) a responsible person shall calculate the position exposure, regardless of whether a UCITS uses VaR for global exposure purposes.

• (4) Paragraph (2) does not apply in the case of an index-based FDI provided the underlying index meets the criteria set out in Regulation 71(1) of the UCITS Regulations.

Borrowings by a UCITS

• (2) A responsible person shall ensure that a UCITS with foreign currency borrowings which exceed the value of the back to back deposit treats that excess as borrowing for the purpose of Regulation 103 of the UCITS Regulations.

Chapter 3 Financial Derivative Instruments

Cover requirements

• (2) A responsible person shall ensure that, at all times:

• (a) the UCITS is capable of meeting all its payment and delivery obligations incurred by transactions involving FDI;

• (b) the risk management process of the UCITS includes the monitoring of FDI transactions to ensure that every such transaction is covered adequately;

• (c) a transaction in FDI which gives rise to, or could potentially give rise to, a future commitment on behalf of a UCITS is covered in accordance with the conditions specified in paragraph (3).

• (3) The conditions to which subparagraph (c) of paragraph (2) refers are:

• (a) in the case of an FDI that is, automatically or at the discretion of the UCITS, cash-settled, the UCITS must, at all times, hold liquid assets that are sufficient to cover the exposure;

• (b) in the case of an FDI that requires physical delivery of the underlying asset, either:

• (i) the asset must at all times be held by a UCITS; or

• (ii) where either or both of the conditions in subparagraphs (a) and (b) of paragraph (4) applies, the UCITS must cover the exposure with sufficient liquid assets.

• (4) The conditions to which clause (ii) of subparagraph (b) of paragraph (3) refers are:

• (a) the underlying asset consists, or the underlying assets consist, of highly liquid fixed income securities;

(b)(i) the exposure can be covered without the need to hold the underlying assets;

• (ii) the specific FDI is addressed in the risk management process; and

• (iii) details of the exposure are provided in the prospectus.

Risk management process and reporting

• (2) The Bank may object to the making of any proposed amendment that is notified to it under paragraph (1).

(3)(a) No proposed amendment to which the Bank has objected under paragraph (2) shall be made to the risk management process of a UCITS.

• (b) Where the Bank has objected under paragraph (2) to the making of a proposed amendment to the risk management process of a UCITS, neither:

• (i) the relevant management company, nor (ii) the relevant UCITS,

shall engage in any activity that is associated with or which would derive from the proposed amendment to which the objection has been made.

Calculation of global exposure

• (a) the UCITS complies with the limits on global exposure;

• (b) the UCITS establishes and implements appropriate internal risk management measures and limits, irrespective of whether the UCITS uses a commitment approach or the VaR approach or any other methodology to calculate global exposure. For the purpose of subparagraph (1), paragraph 12 of Schedule 9 of the UCITS Regulations, a UCITS shall only select a methodology where ESMA has published guidelines on the selected methodology; and

• (c) it calculates the global exposure in accordance with Schedule 2.

Global exposure: commitment approach (structured UCITS)

• (a) the UCITS is managed passively and structured to achieve, at maturity, the pre-defined payoff and holds at all times the assets needed to ensure that this pre-defined payoff will be met;

• (b) the UCITS is formula-based and the pre-defined payoff can be divided into a limited number of separate scenarios which are dependent on the value of the underlying assets and which offer investors different payoffs;

• (c) an investor can be exposed to only one payoff profile at any time during the life of the UCITS;

• (d) the use of the commitment approach as set out in paragraphs 14 to 18 of Schedule 9 of the UCITS Regulations to calculate global exposure for the individual scenarios is appropriate taking into account the provisions of:

• (i) guideline 1, paragraph 2(d) of the ESMA Guidelines on Risk Measurement and the Calculation of Global Exposure for Certain Types of Structured UCITS (Ref: ESMA 4/2011/112);

• (ii) paragraphs 11 to 13 of Schedule 9 of the UCITS Regulations; and

• (iii) guidelines 1, 4 and 5 of box 1 of the ESMA Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (Ref: CESR/10-788);

• (e) the UCITS has a final maturity not exceeding nine years;

• (f) the UCITS does not accept new subscriptions from the public after the initial marketing period;

• (g) the maximum loss the UCITS can suffer when the portfolio switches from one payoff profile to another is limited to 100 per cent of the initial offer price; and

• (h) the impact of the performance of a single underlying asset on the payoff profile, when the UCITS switches from one scenario to another, complies with the diversification requirements of the UCITS Regulations based on the initial net asset value of the UCITS.

• (2) The responsible person of a structured UCITS, within the meaning of Article 36(1) of Commission Regulation (EU) No 583/2010, shall use the commitment approach as set out in paragraphs 14 to 18 of Schedule 9 of the UCITS Regulations, adjusted as provided for in paragraph (3), as the calculation method for a structured UCITS.

• (3) The adjustments to which paragraph (2) refers are that:

• (a) the formula-based investment strategy for each pre-defined payoff is broken down into individual payoff scenarios;

• (b) the FDI implied in each scenario is assessed to establish whether the derivative may be excluded from the calculation of global exposure under boxes 3 and 4 of the ESMA Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS (Ref: CESR/10-788); and

• (c) the responsible person calculates the global exposure of the individual scenarios to assess compliance with the global exposure limit of 100 per cent of net asset value.

Global exposure: Value at Risk approach

• (2) A responsible person shall at all times set the maximum VaR limit of a UCITS according to its defined risk profile.

• (3) A responsible person shall ensure that a UCITS that uses the VaR approach uses:

• (a) the relative VaR approach, or

• (b) the absolute VaR approach,

whichever is the most appropriate methodology given the risk profile and investment strategy of the UCITS to calculate global exposure as set out in Schedule 4.

• (4) For the purposes of paragraph (3):

• (a) a responsible person shall ensure that there is consistency in the choice of the type of VaR used by the UCITS; and

• (b) the decision as to whether to use the relative VaR approach or the absolute VaR approach, and the assumptions underlying that decision, must be documented fully by the responsible person.

• (5) A responsible person shall ensure that:

• (a) the VaR approach used by the UCITS takes into account, as a minimum, general market risk and, if applicable, idiosyncratic risk;

• (b) the event risks or the default risks, or (as the case may be) both, to which the UCITS is exposed following its investments are also be taken into account in the stress testing programme for the purposes of Regulation 21;

• (c) the VaR approach used by the UCITS is appropriate having regard to the investment strategy that is being pursued and the types and complexity of the financial instruments used by the UCITS;

• (d) the VaR approach it selects for the UCITS:

• (i) provides for completeness;

• (ii) assesses the risks with a high level of accuracy; and

• (iii) complies with the conditions set out in paragraph (6); and

• (e) in assessing the global exposure by means of a VaR approach, it complies with the quantitative and qualitative minimum requirements set out in Schedule 4.

• (6) The conditions to which clause (iii) of subparagraph (d) of paragraph (5) refers are that:

• (a) all the positions of the UCITS portfolio are included in the VaR calculation;

• (b) the approach captures adequately all the material market risks associated with portfolio positions and, in particular, the specific risks associated with FDI. For this purpose, the VaR approach must cover all the risk factors that have more than a negligible influence on the fluctuation of the portfolio’s value;

• (c) the quantitative models that are used within the VaR approach, including pricing tools, estimation of volatilities and correlations, shall provide for a high level of accuracy; and

• (d) all data that is used within the VaR approach shall provide for consistency, timeliness and reliability.

Back-testing

• (2) The back-testing programme to which paragraph (1) refers shall provide, for each business day, a comparison of:

• (a) the one-day VaR measure generated by the UCITS model for the UCITS end-of-day positions; and

• (b) the one-day change of the UCITS portfolio value by the end of the subsequent business day.

• (3) The back-testing programme to which paragraph (1) refers shall be conducted at least on a monthly basis, subject to always performing retroactively the comparison for each business day as detailed in paragraph (2).

• (4) A responsible person shall determine and monitor any overshooting of a UCITS on the basis of its back-testing programme.

• (5) Where the results of the back-testing programme undertaken by virtue of this Regulation reveal a percentage of overshootings that exceeds 4 for the most recent 250 business days in the case of a 99 per cent confidence interval, the responsible person must review the VaR approach and make appropriate adjustments.

• (6) Where, in the case of a 99 per cent confidence interval, the number of overshootings for a UCITS for the most recent 250 business days exceeds 4, the responsible person shall:

• (a) inform the senior management of the responsible person, at least quarterly; and

• (b) inform the Bank, at least semi-annually; and

• (c) comply with paragraph (7).

• (7) A responsible person shall provide the senior management of the responsible person and the Bank with:

• (a) an analysis of the sources of overshootings;

• (b) an explanation of the sources of overshootings; and

• (c) a statement of what measures, if any, have been taken to improve the accuracy of the VaR approach.

• (8) For the purposes of this Regulation, “overshooting” means a one-day change in the value of the relevant portfolio that exceeds the related one-day value-at-risk measure calculated by the VaR approach.

Stress-testing

• (2) The requirements to which paragraph (1) refers are:

• (a) the stress-testing programme shall be conducted in accordance with the qualitative and quantitative requirements of paragraphs (5) and (6);

• (b) without prejudice to subparagraph (c), stress tests shall be conducted regularly and in any event not less frequently than once a month;

• (c) stress tests shall be conducted whenever a change in the value or the composition of a UCITS or a change in market conditions makes it likely that the test results will differ significantly from the results of the then-most-recent stress test.

• (3) A responsible person shall ensure that the stress-testing programme:

• (a) is designed to measure any potential major depreciation of the value of a UCITS as a result of unexpected changes in the relevant market parameters and correlation factors; and

• (b) measures changes in the relevant market parameters and correlation factors which could result in a major depreciation of the value of a UCITS.

• (4) A responsible person shall:

• (a) integrate the stress tests required by this Regulation into the risk management process of a UCITS;

• (b) consider the results of the stress tests when making investment decisions for the UCITS; and

• (c) adapt the design of the stress tests in line with the composition of the UCITS and the market conditions that are relevant for the UCITS.

• (5) A responsible person shall ensure that the stress tests:

• (a) cover all risks that affect the value or the fluctuations in value of the UCITS to any significant degree;

• (b) without prejudice to the generality of subparagraph (a), take into account those risks that are not fully captured by the VaR approach that is used;

• (c) are appropriate for analysing potential situations in which the use of significant leverage would expose the UCITS to significant downside risk and could potentially lead to the UCITS having a net asset value less than zero; and

• (d) focus on those risks which, though not significant in normal circumstances, are likely to be significant in stress situations, including:

• (i) the risk of unusual correlation changes;

• (ii) the illiquidity of markets in stressed market situations; and

• (iii) the behaviour of complex structured products under stressed liquidity conditions.

• (6) A responsible person shall:

• (a) establish and implement written clear procedures relating to the design of, and ongoing adaptation of, the stress tests of a UCITS;

• (b) on the basis of the procedures established and implemented in accordance with subparagraph (a), develop a written programme for conducting stress tests;

• (c) include in the programme developed in accordance with subparagraph (b) an explanation as to why the programme is suitable for the UCITS; and

• (d) document clearly, in the programme developed in accordance with subparagraph (b):

• (i) completed stress tests;

• (ii) the results of completed stress tests; and

• (iii) the reasons behind any intention to deviate from the programme.

Value at Risk approach: additional safeguards

• (2) A responsible person shall ensure that the UCITS supplements both the VaR approach and the stress-testing framework, by taking into account the risk profile and the investment strategy that is being pursued, with other risk measurement methods.

Chapter 4 Efficient Portfolio Management

Portfolio management techniques

• (2) A responsible person shall ensure that all the revenues arising from efficient portfolio management techniques and instruments, net of direct and indirect operational costs, are returned to the UCITS.

Collateral

• (a) every asset that is received by a UCITS as a result of engaging in efficient portfolio management techniques and instruments is treated as collateral;

• (b) such techniques comply with the criteria set down in paragraph (2);

• (c) at all times, collateral that is received by a UCITS meets the criteria specified in Schedule 3.

• (2) A responsible person shall ensure that the UCITS risk management process identifies, manages and mitigates risks linked to the management of collateral, including operational risks and legal risks.

(3)(a) Where a UCITS receives collateral on a title transfer basis, the responsible person shall ensure that that collateral is be held by the depositary.

• (b) Where a UCITS receives collateral on any basis other than a title transfer basis, that collateral may be held by a third party depositary provided that that depositary is subject to prudential supervision and is unrelated and unconnected to the provider of the collateral.

• (4) A responsible person shall not sell, pledge or re-invest the non-cash collateral received by the UCITS.

• (5) Where a responsible person invests the cash collateral received by the UCITS, such investments shall only be made in one or more of the following:

• (a) a deposit with a credit institution referred to in Regulation 7;

• (b) a high-quality government bond;

• (c) a reverse repurchase agreement, provided the transaction is with a credit institution referred to in Regulation 7 and the UCITS is able to recall at any time the full amount of cash on an accrued basis; or

• (d) a short-term money-market fund as defined in the ESMA Guidelines on a Common Definition of European Money-Market Funds (Ref: CESR/10-049).

• (6) Where a responsible person invests the cash collateral received by the UCITS:

• (a) that investment shall comply with the diversification requirements applicable to non-cash collateral; and

• (b) invested cash collateral shall not be placed on deposit with the counterparty or with any entity that is related or connected to the counterparty.

• (7) A responsible person shall ensure that, where a UCITS receives collateral for at least 30 per cent of its assets:

• (a) there is in place a stress testing policy that prescribes the components set out in paragraph (8); and

• (b) stress tests are carried out regularly under normal and exceptional liquidity conditions to enable the responsible person to assess the liquidity risk attached to the collateral.

• (8) The components of the stress-testing policy to which paragraph (7) refers are:

• (a) the design of stress test scenario analysis including calibration, certification and sensitivity analysis;

• (b) the empirical approach to impact assessment, including back-testing of liquidity risk estimates;

• (c) the reporting frequency and the threshold(s) for limits and losses; and

• (d) the mitigation actions to be taken to reduce loss including haircut policy and gap risk protection.

• (9) A responsible person shall, in accordance with paragraph (10), establish and ensure adherence to a haircut policy for the UCITS, adapted for each class of assets received as collateral.

• (10) The requirements to which paragraph (9) refers are:

• (a) when devising the haircut policy, a responsible person shall take into account the characteristics of the assets, such as the credit standing or the price volatility, as well as the outcome of the stress tests performed in accordance with Regulation 21;

• (b) the responsible person shall document the haircut policy; and

• (c) the responsible person shall justify and document each decision to apply a specific haircut or to refrain from applying any haircut, to any specific class of assets.

• (11) Where a counterparty to a repurchase or a securities lending agreement, which has been entered into by the responsible person on behalf of the UCITS:

• (a) was subject to a credit rating by an agency registered and supervised by ESMA that rating shall be taken into account by the responsible person in the credit assessment process; and

• (b) where a counterparty is downgraded to A-2 or below (or comparable rating) by the credit rating agency referred to in subparagraph (a) this shall result in a new credit assessment being conducted of the counterparty by the responsible person without delay.

• (12) A responsible person shall ensure that it is at all times able to recall any security that has been lent out or to terminate any securities lending agreement to which it is party.

Repurchase and reverse repurchase agreements

• (2) In circumstances in which cash is, by virtue of the obligation under paragraph (1), recallable at any time on a mark-to-market basis, the responsible person shall use the mark-to-market value of the reverse repurchase agreement for the calculation of the net asset value of the UCITS.

• (3) A responsible person that enters into a repurchase agreement shall ensure that a UCITS is at all times able to recall any securities that are subject to the repurchase agreement or to terminate the repurchase agreement into which it has entered.

Chapter 5 Share Classes

Creation of share classes in a UCITS

• (a) the constitutional document of the UCITS provides for the creation of share classes and, in the case of an umbrella UCITS, the provision in the constitutional document to establish the way in which sub-funds, and share classes within sub-funds, are created, is clear and unambiguous;

• (b) each UCITS and, in the case of umbrella UCITS, each sub-fund thereof consists of a single common pool of assets;

• (c) the capital gains or losses and income arising from the common pool of assets must be distributed or must accrue equally to each unit-holder relative to their participation in the UCITS or sub-fund thereof, or must both be distributed and accrue in that manner; and

• (d) unit-holders in a share class must be treated equally and fairly, or where there is more than one share class all unit-holders in the different share classes must be treated fairly.

• (2) A responsible person shall ensure that all share classes within the UCITS or sub-funds thereof have the same dealing procedures and frequencies.

• (3) Where a UCITS engages in currency hedging at the level of a share class, the responsible person shall:

• (a) ensure that over-hedged positions do not exceed 105 per cent of the net asset value of the hedged currency share class;

• (b) keep hedged positions under review to ensure that over-hedged positions do not exceed the level permitted by subparagraph (a);

• (c) in the review that is required by virtue of subparagraph (b), incorporate a procedure to ensure that any position that is materially in excess of 100 per cent of net assets shall not be carried forward from month to month;

• (d) clearly attribute transactions to a specific class;

• (e) not combine or offset currency exposures of different currency classes or allocate currency exposures of assets of the UCITS to separate share classes; and

• (f) ensure that the costs and gains or losses of the hedging transactions will accrue solely to the relevant class.

Chapter 6 Constitutional Documents

Fees

• (i) the maximum fee that may be charged by the management company; and

• (ii) the maximum fee that may be charged by an investment manager appointed by the responsible person, where that fee is paid directly out of the assets of the UCITS.

• (b) In the case of a UCITS constituted as an ICAV or investment company the matters specified in subparagraph (a) may be included in either the constitutional documents of the UCITS or in the relevant management agreement.

• (2) Any fee, under paragraph (1), that is specified as being payable to a management company or to an investment manager shall include any performance-related fee that that management company or investment manager (as the case may be) may charge.

(3)(a) The maximum fee that may be charged by a management company or an investment manager pursuant to paragraph (1) shall not be increased without approval of the unit-holders of the UCITS on the basis of a simple majority of votes cast in general meeting or such other majority as is specified in the constitutional document of the relevant UCITS or with the prior written approval of all unit-holders of the fund (in accordance with the constitutional documents).

• (b) If a fee that is disclosed in the prospectus for a UCITS is less than the maximum relevant fee that is permitted in the constitutional document, prior unit-holder approval is required for any proposed increase in the fee that is disclosed in the prospectus, unless the prospectus also provides that a fee greater than the fee disclosed in the prospectus may be charged.

(4)(a) A responsible person shall provide unit-holders of a UCITS with reasonable notice in the event of an increase in the maximum fee that may be charged by a management company or an investment manager.

• (b) Notice given for the purposes of subparagraph (a) must be sufficient to enable a unit-holder, to redeem some or all of the unit-holder’s units prior to the implementation of the proposed increase.

Investment

Umbrella UCITS

• (a) belong exclusively to the relevant sub-fund; and

• (b) may not be used to discharge, directly or indirectly, the liabilities of or claims against any other sub-fund and are not available for any such purpose.

Distributions out of, and charging of fees and expenses to, capital

• (2) Where, in accordance with paragraph (1), a responsible person is permitted by the constitutional document of a UCITS to make distributions from or charge fees and expenses to the capital of a UCITS, every such distribution or charge must be in accordance with any provisions contained in that constitutional document concerning the making of a distribution or the imposition of a charge.

• (3) A responsible person of a UCITS which proposes to make distributions out of capital shall:

• (a) include the risk warning in its prospectus, as specified in Regulation 68(1)(d);

• (b) ensure that any income statement issued to unitholders includes a statement to explain the effect of this accounting policy, including wording to the effect that the investor’s capital amount has been reduced;

• (c) include the following in bold text in the subscription application form, if fees and expenses which may be charged to capital include management fees:

“Unitholders should note that all or part of fees and expenses including (if applicable) management fees may be charged to the capital of the UCITS. This will have the effect of lowering the capital value of your investment.”

Dealing in specie

• (a) the nature of the assets to be transferred into the UCITS would qualify as investments of the UCITS in accordance with the investment objectives, policies and restrictions of the UCITS;

• (b) assets that are to be transferred must be vested with the depositary or arrangements must be made to vest the assets with the depositary;

• (c) the amount of units to be issued must not exceed the amount that would be issued for the cash equivalent of the subscription in specie; and

• (d) the depositary is satisfied that either:

• (i) the terms of any exchange will not be such as are likely to result in any material prejudice to the existing unit-holders of the UCITS; or

• (ii) there is unlikely to be any material prejudice to the existing unit-holders of the UCITS.

(2)(a) This paragraph does not apply to a UCITS ETF the original subscription to which was made in specie.

• (b) Subject to subparagraph (a), a responsible person shall ensure that, where the constitutional document of a UCITS provides for redemption in specie, it also contains provisions that require, in respect of such a redemption in specie, that:

• (i) redemption in specie is at the discretion of the UCITS and with the consent of the redeeming unit-holder; and

• (ii) asset allocation is subject to the approval of the depositary.

• (c) Notwithstanding subparagraph (b), where the redeeming unit-holder requests redemption of a number of units that represent 5 per cent or more of the net asset value of the UCITS, the responsible person may, without the consent of the redeeming unitholder, where utilising the discretion of the UCITS, determine to provide redemption in specie subject to such redemption being provided for in the constitutional documents and:

• (i) in that event the UCITS shall, if requested to do so, sell the assets on behalf of the unit-holder after the redemption has been effected; and

• (ii) the cost of any sale in accordance with clause (i) can be charged to the unit-holder.

• (3) A responsible person shall ensure that, where the constitutional document of a UCITS provides for distribution in specie upon a winding up, it shall also require that, in respect of such a distribution in specie upon a winding up:

• (a) an ordinary resolution or the prior written approval of all unit-holders of the relevant fund or a resolution passed by such majority as is specified in the constitutional document, is required; and

• (b) the UCITS must sell the assets if a unit-holder requests it to do so, in which event the costs of such sale may be charged to the redeeming unit-holder.

Replacement of depositary

• (a) the appointment of the new depositary must be approved in advance by the Bank;

• (b) the current depositary may not retire until a new depositary is appointed in accordance with paragraph (a); and

• (c) if:

• (i) despite attempts by the responsible person to appoint a new depositary, no replacement for the current depositary has been appointed in accordance with this Regulation, and

• (ii) the current depositary is unwilling or unable to continue to act as such,

then:

• (I) a general meeting of the UCITS shall be convened at which an ordinary resolution, or such a resolution passed by such majority as is specified in the constitutional document, to wind up or otherwise dissolve the UCITS is proposed; and

• (II) the appointment of the current depositary may be terminated only upon the revocation of the authorisation of the UCITS.

Chapter 7 Dealing

Subscriptions and redemptions

• (b) A responsible person may in exceptional circumstances accept an application for subscription or redemption of units in a UCITS after the dealing deadline, and before the valuation point, provided that:

• (i) the decision to accept the application after the dealing deadline has been approved by senior management of the responsible person; and

• (ii) the exceptional circumstances under which the application was received is fully documented by the responsible person.

• (2) A responsible person shall pay the redemption proceeds to a redeeming unit-holder within ten business days of the relevant dealing deadline.

• (3) Where:

• (a) the total requests for redemption on any dealing day for a UCITS or a sub-fund thereof exceed at least 10 per cent of the total number of units in the UCITS or sub-fund or at least 10 per cent of the net asset value of the UCITS or sub-fund, and

• (b) the responsible person decides to refuse to redeem any units in excess of 10 per cent of the total number of units in the UCITS or sub-fund or 10 per cent of the net asset value of the UCITS or sub-fund or such higher percentage that the responsible person may determine,

the UCITS shall reduce pro rata any request for redemption on that dealing day and shall treat the redemption requests as if they were received on each subsequent dealing day until all the units to which the original request related have been redeemed.

Chapter 8 Valuation

Valuation policy

(2)(a) A valuation policy shall set out the valuation methodology of the assets of the UCITS, in accordance with paragraph (3).

• (b) The valuation policy shall be included in the constitutional document of the UCITS.

• (3) A valuation policy shall provide and ensure that:

• (a) the valuation methodologies of a UCITS and the pricing of units treat incoming, existing and outgoing investors in the UCITS fairly;

• (b) where the valuation policy is to calculate both a bid and offer price for units in a UCITS, the methodologies for both must be clear, unambiguous and disclosed;

• (c) the valuation methodologies, including provisions which allow for a switch from a mid-market to a bid or offer basis, are applied on a consistent basis throughout the life of a UCITS; and