19 October 2012

ALFI's reply to the EC Consultation Document on UCITS

ALFI welcomes the European Commission Consultation Document on UCITS product rules, liquidity management, depositary, money market funds and long-term investments. In the present response to this consultation ALFI wishes to develop the following views:

In ALFI's opinion there is no need to review the scope of assets and exposures that are deemed eligible for a UCITS fund or the extent of the existing framework for EPM techniques.

Regarding securities lending, ALFI believes that there is no need to extend further the existing framework as it already features adequate requirements.

With regard to OTC derivatives, a harmonised regime dealing with the counterparty risk in connection with instruments and EPM transactions would mean better investor protection. Concerning operational risks resulting from UCITS contracting with a single counterparty, ALFI believes that the current risk management requirements are appropriate.

As to extraordinary liquidity management tools, ALFI believes there is no single framework which could be effective across all types of UCITS. Exceptional cases to suspend should be proposed by the fund managers and decided by the Board based on recommendations by risk managers. A fixed set of criteria for such decision would not be useful. Furthermore, time limits to trigger fund liquidation would also not be effective in ALFI'sview. ALFI would like to underline that side-pockets should not generally be permitted, and should only be used as a last resort. Finally, regarding liquidity safeguards in ETF secondary markets the topic is already adequately addressed in the current framework.

On the issue of the Depositary passport, it must be underlined that whilst it is fair to say that the UCITS V regulation can be considered as a major step forward to the implementation of a Depositary Bank passport, ALFI is of the strong opinion that before moving forward, the Commission should thoroughly assess and re-examine whether:

• the existing UCITS EU Regulatory framework as well as the way the Fund industry stakeholders interact and interpret the regulation are effectively compatible with an EU passport for Depositary; and
• the implementation of a model where all the stakeholders (apart from the fund Regulator) could be located outside the domicile of the fund, potentially in three different jurisdictions, would have adverse consequences on investor protection.

ALFI therefore recommends a prudent approach vis-à-vis the Depositary passport and does not see it as a major priority for the future development of the UCITS brand.

Concerning money market funds, ALFI broadly supports the EFAMA position. The reform of MMFs should mainly focus on the fund's internal liquidity risk. ALFI agrees that certain incremental steps could be considered to enhance further these products’ ability to resist pressure in times of crisis. However, ALFI only sees a further harmonisation within the UCITS regime. In the context of the discussion on additional regulation of CNAV, ALFI would like to underline that eliminating the ability to retain a constant NAV would eliminate the ability to manage the fund so as to provide for yield stability, and would put increased pressure on the demand for bank deposits.

On the topic of long-term investments, ALFI welcomes the Commission’s proposal to investigate the role that the investment fund industry could play in channelling retail investors' money towards the financing of long-term investments in Europe supporting infrastructure and social development through the set-up of a common framework for long-term investments for retail investors. ALFI however believes that such a framework should be dealt with in a parallel and distinct regime from the UCITS regime.

Finally, with regard to UCITS IV improvement, and self-managed investment companies in particular, ALFI is of the opinion that some level of consistency in the application of prudential rules for self-managed investment companies could be appropriate, and that certain prudential rules contained in UCITS IV Management Company Directive applicable to management companies could be applied to self-managed investment companies. However, ALFI deems it of utmost importance that due consideration to the principle of proportionality is given in order to avoid significant organisational requirements and related costs and ensure that the SICAV model remains viable.

As regards master feeder structures, ALFI agrees that the scenario of the conversion of a feeder UCITS into an ordinary UCITS is comparable with the conversion of a UCITS into a feeder and cases where a master UCITS changes. Therefore, similar information standards ensuring consistency of the treatment of master-feeder structures should apply. ALFI would also like to suggest further improvements related to UCITS investments in feeder funds, the calculation of the percentage of investments not held in the master fund, the calculation of the global exposure at the level of the feeder fund, the applicable law to the agreements, and the contribution in kind.

ALFI agrees with the suggestion to clarify the provisions on the timelines for mergers, and also with the proposal for an electronic notification of updates to the UCITS host Member State, the clarification that information on a share class is limited to share classes marketed in a host Member State, and the introduction of a regulator-to-regulator notification for any changes to the notification file. In addition ALFI would recommend that the procedure to de-register a UCITS or a share class is foreseen.

Finally, ALFI does not consider that a systematic alignment between the AIFMD and UCITS regime is needed in order to improve consistency of rules on the European asset management sector. An appropriate level of consistency should rather be encouraged if and when it is justified. In ALFI's view, the AIFMD framework should first be digested and implemented before assessing whether to harmonise further the UCITS regime.

Full response

© ALFI - Association of the Luxembourg Fund Industry