ESMA shakes up securities lending for UCITS funds 26 July 2012Paris Reporter: Mark Dugdale
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The European Securities and Markets Authority (ESMA) has released guidelines on exchange-traded funds (ETFs) and other UCITS issues that affect securities lending and collateral diversification.
The guidelines were developed following a review of the current regulatory regime in Europe. ESMA found it to be “insufficient to address the specific features and risks associated with” index-tracking UCITS and UCITS ETFs and the efficient portfolio management (EPM) techniques, such as securities lending, repo and reverse repo, that they may carry out.
In a statement, ESMA added: “[T]hese guidelines are a valuable response to many of the issues identified in the on-going debate on shadow banking and will constitute and important step in the development of the regulatory framework of UCITS.”
Some commentators have said that under the guidelines all revenue that is made from securities lending must be returned to a UCITS fund and its investors.
But the International Securities Lending Association (ISLA) has questioned this. ESMA’s guidelines state: “All the revenues arising from efficient portfolio management techniques, net of direct and indirect operational costs, should be returned to the UCITS.”
In a statement, ISLA said: “This last sentence has been the subject of some press speculation which we think is exaggerated. Whilst the wording is not as clear as we would like, we assume that it is not ESMA's intention to preclude a securities lending agent (which could be the fund manager, custodian bank or a third party firm) from charging a commercially appropriate fee for providing their services.”
“We are in the process of trying to get more clarity on this part of the guidance and will be in touch with members on this point in due course.”
An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.
UCITS funds that carry out securities lending have to inform investors about the activity and its associated risks, according to the guidelines.
The guidelines also allow a UCITS fund that is in a securities lending agreement to recall “any securities lent” at “any time” and “terminate any agreement into which it has entered”, according to the ESMA statement.
On collateral, the guidelines require UCITS funds that receive collateral to mitigate counterparty risk in OTC derivative transactions or EPM techniques to ensure that the collateral “complies with very strict qualitative criteria and specific limits in relation to the diversification”, added the ESMA statement.
ESMA chair Steven Maijoor said: “These comprehensive guidelines are aimed at strengthening investor protection and harmonising regulatory practices across this important EU fund sector.”
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