ESMA Regulation - Undertakings for Collective Investment in Transferable Securities V

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UCITS V
Proposal Date Passed By EU In Effect
July 3rd, 2012 July 23rd, 2014 March 18th, 2016

On July 23, 2014 UCITS V was passed by the European Parliament and it entered into force on September 17th, 2014. The update to the UCITS directive seeks to harmonize the existing directive with AIFMD.

Background

UCITS V is the fifth installment of the Undertakings for Collective Investment in Transferable Securities directive ("UCITS"), which was first passed in 1985 by the EEC. UCITS V was passed in reaction to both the Madoff Scandal and the collapse of Lehman Brothers during the 2007-2008 financial crisis. Since it's original passing in 1985, the purpose of the directives have been to harmonize the regulatory regime. Updates to it have occurred since then in response to multiple factors. See UCITS Regulation for more information.

Remuneration

UCITS V will have new remuneration requirements similar to those found in CRD-IV. This will include a requirement that 50% of all variable remuneration be in the form of stock, or other financial instruments that have with equally effective incentives. Additionally at least 40% of variable remuneration will need to be deferred over a period of no less than 3 years.[1]

Depositary Rules

The directive requires that new eligibility requirements, safekeeping requirements, and duties in regards to oversight and cash monitoring. Additionally it expands liability for mismanaged funds.

Eligibility

The eligibility to fall under the directive has been updated so that the following types of institutions are under it:

  • Credit institutions, as defined by CRD-IV
  • National central banks
  • Any other legal entities authorized by national authorities that are subject to capital requirements that are equivalent to CRD-IV/CRR

Safekeeping

The new directive creates two classes of financial instruments. These two categories are financial instruments that can be held by a depository, and non-physically held assets that require record-keeping and ownership verification.

  • In regard to the instruments that can be held the new provisions are as follows:
    • The instruments have to be held in an account that is on the books and must have a financial instruments physically delivered to it.
    • Assets that are held must recorded as being in registered segregated accounts, that are registered in either the UCITS fund name or the company that manages the UCITS fund name
    • Restrictions on reuse of assets are imposed
    • Securities held by the depositary or its delegate are unavailable to creditors in cases of insolvency[2]
  • The new rules for non-physically held assets are:
    • The depositary has to verify ownership
    • "Ownership verification should be based on information and documentation provided by the UCITS or the management company and, where available, on external evidence." [3]

Oversight and Cash Monitoring

New oversight and cash monitoring duties are created by the Directive for depositories. They include:

  • Cash flows must be monitored by the depositary
  • Transactions of units of the UCITS fund must be carried out in accordance with national law
  • The income must be applied according to national law
  • The fund must be valued according to national law[4]

Sanctions

The directive also sets to standardize the sanctions regime across the EU. Under Article 99a of the Directive it gives a defined list of when firms must be sanctioned. It allows the national authorities to choose whether it will be a criminal or administrative sanction.[5]

UCITS V as it Appears in The Official Journal of the European Union and Related Documents


References

  1. UCITS V Overview. Matheson. Retrieved on May 26th, 2015.
  2. UCITS V Directive: in a nutshell. Lexology. Retrieved on May 26th 2015.
  3. UCITS V Directive: in a nutshell. Lexology. Retrieved on May 26th 2015.
  4. UCITS V Directive: in a nutshell. Lexology. Retrieved on May 26th 2015.
  5. UCITS V Fact Sheet on Sanctions. Matheson. Retrieved on May 26th, 2015.

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