Repo and reverse repo assets to be recallable in EU
05 December 2012 Paris
Image: Shutterstock
UCITS funds should only enter into repo and reverse repo agreements if they are able to recall assets or cash at any time, according to the European Securities and Markets Authority’s (ESMA’s) latest guidelines.
The guidelines come as ESMA attempts to fulfill its mandate to enhance the protection of investors and reinforce stable and well functioning financial markets in the EU.
It published proposals for UCITS funds entering into repo and reverse repo agreements in July as a part of its controversial guidelines on exchange-traded funds (ETFs) and other UCITS issues that affect securities lending.
ESMA’s guidelines on ETF and other UCITS caused confusion when they were published, leading some commentators to believe that under the guidelines all revenue that would be from securities lending would have to be returned to a UCITS fund and its investors.
In a statement that was released at the time, the International Securities Lending Association’s chief executive, Kevin McNulty, sought to clarify the situation. He said that the normal method of compensation for securities lending services is for an agent to charge a commission.
“In our opinion there is nothing in the guidance that precludes a securities lending agent, be that the fund manager, custodian or third party, from charging a commercial fee for their services. Such fees would be regarded as part of the direct and indirect costs which the guidelines state may be deducted from revenue.”
An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.
ESMA published the final repo and reverse repo guidelines on 4 December following a consultation period.
Under the guidelines, UCITS funds should be able to recall assets that are subject to repo arrangements at any time, while those that are engaged in reverse repo should be able to recall the full amount of cash at any time on either an accrued or mark-to-market basis.
ESMA originally proposed allowing a proportion of assets “to be non-recallable at any time at the initiative of the UCITS”, and then only assets in overnight repo and reverse repo arrangements would be recallable at any time.
But its guidelines now apply to all fixed-term repo and reverse repo agreements that do not exceed seven days.
The guidelines will be translated into the languages of all EU members and incorporated into ESMA’s guidelines on ETFs and other UCITS issues. The combined guidelines will enter into force two months after the translations are published.
The guidelines come as ESMA attempts to fulfill its mandate to enhance the protection of investors and reinforce stable and well functioning financial markets in the EU.
It published proposals for UCITS funds entering into repo and reverse repo agreements in July as a part of its controversial guidelines on exchange-traded funds (ETFs) and other UCITS issues that affect securities lending.
ESMA’s guidelines on ETF and other UCITS caused confusion when they were published, leading some commentators to believe that under the guidelines all revenue that would be from securities lending would have to be returned to a UCITS fund and its investors.
In a statement that was released at the time, the International Securities Lending Association’s chief executive, Kevin McNulty, sought to clarify the situation. He said that the normal method of compensation for securities lending services is for an agent to charge a commission.
“In our opinion there is nothing in the guidance that precludes a securities lending agent, be that the fund manager, custodian or third party, from charging a commercial fee for their services. Such fees would be regarded as part of the direct and indirect costs which the guidelines state may be deducted from revenue.”
An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.
ESMA published the final repo and reverse repo guidelines on 4 December following a consultation period.
Under the guidelines, UCITS funds should be able to recall assets that are subject to repo arrangements at any time, while those that are engaged in reverse repo should be able to recall the full amount of cash at any time on either an accrued or mark-to-market basis.
ESMA originally proposed allowing a proportion of assets “to be non-recallable at any time at the initiative of the UCITS”, and then only assets in overnight repo and reverse repo arrangements would be recallable at any time.
But its guidelines now apply to all fixed-term repo and reverse repo agreements that do not exceed seven days.
The guidelines will be translated into the languages of all EU members and incorporated into ESMA’s guidelines on ETFs and other UCITS issues. The combined guidelines will enter into force two months after the translations are published.
NO FEE, NO RISK
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