On July 25, the European Securities Markets Authority (ESMA) released ESMA/2012/475, a Report and Consultation Paper comprising guidelines on Exchange Traded Funds (ETFs) and other issues relating to UCITS funds (Undertakings for Collective Investment in Transferable Securities) and a Consultation Paper on repurchase and reverse repurchase agreements.

In the Guidelines (Annex III of the document), ESMA imposes additional conditions and/or modifies existing rules on:

• index-tracking UCITS and index-tracking leveraged UCITS
   
• UCITS ETFs and actively-managed UCITS ETFs
   
• redemption conditions for secondary market investors of all UCITS ETFs
   
• the use of efficient portfolio management techniques, total return swaps and similar derivatives
   
• the management of collateral for OTC derivatives and efficient portfolio management techniques
   
• the use of financial indices by UCITS.

Of particular note is guideline 29 which requires that all revenues (net of operational costs) arising from the use of efficient portfolio management techniques (such as securities lending) must be returned to the UCITS. This will prohibit the current common practice under which such revenues are split between the UCITS investment manager and the UCITS fund.

In the Consultation Paper on repos (Annex IV of the document), ESMA seeks views on the appropriate treatment of repo and reverse repo arrangements, in particular the proportion of its assets that a UCITS can place under arrangements under which the UCITS cannot “recall” securities – i.e. terminate the repo at short notice with respect to some or all of the included securities. The Consultation period closes on September 25.

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