Undertakings for Collective Investment in Transferable Securities (UCITS)

Background

The Undertakings for Collective Investment in Transferable Securities (UCITS) (Directive 2014/91/EC) was first adopted in 1985. It aims to offer greater business and investment opportunities for both asset managers and retail investors, by integrating the EU market for investment funds. The current Directive (UCITS V) sets out a harmonised regulatory framework for cross-border distribution, supervision, delegation and passporting, depositaries, and remuneration. As one of the most asset important holders of investment assets in Europe, UCITS have a logical part to play in the context of both the development of investment activities across Europe but also as part of the broader Capital Markets Union (CMU) agenda.

Overview

Since the first UCITS Directive was published, further iterations have been adopted by the European Commission, with the most recent Directive (UCITS V) aligning broad aspects of UCITS regulation, with the Alternative Investment Fund Managers Directive (AIFMD). AIFMD applies to funds which are not registered under the UCITS framework, such as hedge funds. UCITS V strengthens the rules around eligible entities that act as a depositary, and only central banks, credit institutions and regulated investment firms that have the appropriate infrastructure and capital will be eligible to provide safekeeping services of assets. The framework also allows for assets to be protected in the event of insolvency, and aims to provide greater transparency for investors.

In 2018, the European Commission published two amending delegated regulations to amend the obligation of depositaries with regards to the safekeeping of financial instruments, held by AIFs and UCITS. The amendments outlined the regime for the segregation of assets held in a sub-custody chain.

Scope

The Directive applies to undertakings for collective investment in transferable securities (UCITS) established within the territories of the EU Member States, as defined in Chapter 1 of Directive 2009/65/EC.

Impact on Securities Lending

There are several regulatory restrictions around securities borrowing and lending of assets for UCITS, with varying differences across transposition of EU Member States. In 2018, ESMA released its final report on a peer review for the guidelines on ETFs and UCITS issues, in which it noted that ‘UCITS are a key financial instrument for retail investors in the EU, accounting for around 75% of all collective investments by retail investors in Europe’. The regulation stipulates in Article 51 that ‘Member States may authorise UCITS to employ techniques and instruments relating to transferable securities and money market instruments under the conditions and within the limits which they lay down, provided that such techniques and instruments are used for the purpose of efficient portfolio management.’ Efficient portfolio management (EPM) techniques include securities lending and repo. Within the policy recommendations it was stated that there is no consistent definition of EPM across Member States, however ‘One set of activities, in particular securities lending activities and (reverse) repurchase agreements, seem to be generally considered to be falling under the definition of EPM’. The level of regulation in securities lending by UCITS has increased over recent years following the introduction of requirements, such as those set out in the Securities Financing Transactions Regulation (SFTR).

ISLA has done considerable work with both policymakers and industry stakeholders to reflect the importance of UCITS to investment markets across Europe.