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Efficient Portfolio Management (EPM)
Asset Management and Investment Council (AMIC) members highlighted that ESMA has explained in its consultation issued in January 2012 (ESMA 2012/44) on guidelines on ETF and other UCITS issues that EPM encompasses securities lending and repos. Securities lending brings extra revenues to the funds and their holders. Reverse repos and repos are largely used as means to adjust cash position of the funds in a safe, flexible and profitable way. In that respect they are closer to common investment tools than to EPM techniques. Revenue sharing agreements provide that UCITS holders get the extra revenues through securities lending or repo and that the intermediary receives an appropriate reward for providing this activity and cover its costs. As part of the service it is expected that fund managers carefully monitor the counterparty risk of the funds they manage and follow counterparty’s credit worthiness on a continuous basis. No other types of transaction should be considered as EPM.
OTC derivatives
The introduction of mandatory clearing through CCPs will have an impact on how counterparty risk for OTC derivatives will be assessed - and thus the legal structure of CCPs as well as monitoring of the time sequence of successive bookings and associated risks (executing broker, clearing member, CCP) will be key. However members are concerned that mandatory or recommended clearing could lead to a difficulty in complying with counterparty risk limits of UCITS. Since clients’ accounts will be legally segregated, CCPs should not create a counterparty risk. CCPs should also have access to central bank’s money and be strictly regulated and monitored by authorities to ensure their solvency.