The European Securities and Markets Authority has revised its collateral guidelines for OTC derivatives trading to allow UCITS funds that meet the criteria for being a money market fund or short-term money market fund to receive 100% of the UCITS fund’s net asset value in collateral in the form of government securities.
Under the original proposed guidelines issued in December 2012, any ETF or UCITS engaging in OTC derivatives activity can only receive 20% of the fund’s NAV in collateral from a single issuer, and if the fund deals with multiple counterparties, the baskets of collateral need to be aggregated so that the 20% limit still applies.
After receiving requests to amend the guidelines, ESMA considered two options. One would have allowed all UCITS funds to receive government securities as collateral equal to 100% of its NAV. The second option, which was ultimately decided upon by ESMA, only grants this allowance to funds qualifying as a money market fund or short-term money market fund.
However, this allowance still has diversification requirements. This collateral needs to be composed of at least six different issues and securities from a single issue cannot exceed 30% of the total collateral received.
ESMA is now seeking comment on the guidelines.
ESMA Revises Collateral Requirements for UCITS Funds
The European Securities and Markets Authority has revised its collateral guidelines for OTC derivatives trading to allow UCITS funds that meet the criteria for being a money market fund or short-term money market fund to receive 100% of the UCITS fund's net asset value in collateral in the form of government securities.