UCITS should only enter into repo and reverse repo agreements if they are able to recall at any time any assets or the full amount of cash, according to final guidelines from the European Securities and Markets Authority (ESMA). The regime is designed to ensure that UCITS, which enter into these arrangements, can continue to execute redemptions.
The guidelines, published yesterday, follow a report by ESMA in July on guidelines on ETFs and other UCITS issues, which included a consultation paper on the recallability of repurchase and reverse repurchase agreements. Among other topics, the guidelines adopted by ESMA in July 2012 addressed the issue of the use by UCITS of efficient portfolio management techniques such as securities lending. In particular, the guidelines provide that UCITS entering into securities lending agreements should be able at any time to recall any assets subject to such agreements. However, with respect to repo and reverse repo agreements, ESMA felt it necessary to further consult on the issue with a view to adopting the most appropriate approach.
Specifically on reverse repo, UCITS should be able to recall at any time the full amount of cash on either an accrued or a mark-to-market basis. However, when cash is recalled on a mark-to-market basis, the mark-to-market value of the reverse repo agreements should be used for the calculation of the net asset value of the UCITS; andIn addition, ESMA considers fixed-term repurchase and reverse repo agreements that do not exceed seven days as arrangements that allow the assets to be recalled at any time by the UCITS.
The guidelines will now be translated into all EU languages and will be incorporated into ESMAs Guidelines on ETFs and other UCITS issues, published in July 2012. The full set of guidelines will enter into force two months after the publication of the translations. The result will be a comprehensive regulatory framework for UCITS.
(JDC)