20 December 2013

ESMA consults on Revision of the provisions on diversification of collateral in ESMA's guidelines on ETFs and other UCITS issues

Since the entry into force of ESMA‘s guidelines on ETFs and other UCITS issues  on 18 February 2013, ESMA has been asked by stakeholders on numerous occasions to reconsider its position on the requirements on collateral diversification.

These were claimed to have a significant adverse impact on UCITS‘ collateral management policies. Stakeholders drew particular attention to the consequences for money market funds that place cash into reverse repurchase agreements. Therefore, ESMA is publishing a consultation paper which seeks stakeholders’ views on the merits of revising the requirements on collateral diversification and, should this be necessary, on the best ways to address stakeholders’ concerns while retaining the appropriate  level of investor protection.

ESMA proposes to replace the text in paragraph 43(e) of the guidelines on ETFs and other UCITS issues (ESMA/2012/832) with the following text:

Collateral diversification (asset concentration) - collateral should be sufficiently diversified in terms of country, markets and issuers. The criterion of sufficient diversification with respect to issuer concentration is considered to be respected if the UCITS receives from a counterparty of efficient portfolio management and over-the-counter financial derivative transactions a basket of collateral with a maximum exposure to a given issuer of 20% of the UCITS’ net asset value. When a UCITS Is exposed to different counterparties, the different baskets of collateral should be aggregated to calculate the 20% limit of exposure to a single issuer.

By way of derogation from this sub-paragraph, a UCITS that meets the criteria for the definition of Money Market Fund or Short-Term Money Market Fund of the guidelines on a common definition of European money market funds (Ref. 10-049) may receive collateral up to 100 per cent of the UCITS’ net asset value in different transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country, or a public international body to which one or more Member States belong. Such a UCITS should receive securities from at least six different issues, but securities from any single issue should not account for more than 30 per cent of the collateral received.This derogation does not affect the other criteria for collateral management as set out in paragraphs 41 to 47 of the guidelines.

ESMA invites comments on all matters in this paper by 31 January, 2014.

Full consultation paper

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