Updated CSSF Q&A on UCI Law and MMF Regulation - Ancillary liquid assets of UCITS
19 November 2024 _ Regulatory & compliance
Compliance by UCITS with the conditions described in these FAQs is expected as soon as possible and by 31 December 2022 at the latest.
The most important changes and clarifications introduced into the CSSF FAQs on UCI Law concern the following interpretation, conditions and limit applicable to the holding of “ancillary liquid assets” by Luxembourg UCITS:
- ancillary liquid assets should be limited to bank deposits at sight only, such as cash held in current accounts with a bank accessible at any time, in order to cover current or exceptional payments, or for the time necessary to reinvest in UCITS eligible assets in line with the UCITS' investment policy or for a period of time strictly necessary in case of unfavourable market conditions;
- a Luxembourg UCITS can only hold such ancillary liquid assets up to 20% of its NAV (instead of 49% of its NAV under the previous CSSF regulatory practice);
- a temporary breach of the above 20% limit is acceptable only in exceptionally unfavourable market conditions and where such breach is justified by the interests of investors (CSSF brings examples such as the 9/11 attacks and the 2008 Lehman Brother bankruptcy);
- bank deposits, money market instruments and money market funds should no longer be classified as ancillary liquid assets under Article 41(2) b) of the UCI Law when they meet the criteria of Article 41(1) of the UCI Law (i.e. in such case they qualify as “eligible investments” for UCITS), and other money market instruments may also constitute “eligible investments” for UCITS under the so-called “trash ratio” when they do not meet the criteria of Article 41(1) of the UCI Law;
- margin accounts do not qualify as ancillary liquid assets under Article 41(2) b) of the UCI Law nor as bank deposits under Article 41 (1) f) of the UCI Law.
The CSSF also takes the opportunity of these FAQs on UCI Law to recall that Luxembourg UCITS are only authorised to invest in eligible assets under Article 41(1) of the UCI Law (including bank deposits, money market instruments and/or other eligible assets) if this is clearly disclosed in their investment policy, and accompanied by a disclosure specifying whether these assets are/may be used to achieve investment goals, for treasury and cash management purposes, and/or in case of unfavourable market conditions. If a Luxembourg UCITS invests in a category of assets that is not foreseen in its investment policy, the provisions of CSSF Circular 02/77 concerning the protection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules will apply.
Finally, as ancillary liquid assets are now limited to deposits at sight with banks, the CSSF clarifies that the 20% diversification limit on deposits with a same body (Article 43(1) of the UCI Law) applies to ancillary liquid assets but does not apply to margin accounts.
UCITS will need to assess their investment policies and consider amending the current disclosures made in their prospectuses as appropriate, namely to clearly describe the possibility (i) to invest in eligible assets under Article 41(1) of the UCI Law (such as bank deposits and money market instruments) and the purpose for which such investments are made (investment purposes, treasury purposes and/or unfavorable market conditions), and (ii) to hold ancillary liquid assets within the meaning and limits as accepted by the CSSF. UCITS’ compliance monitoring systems should also be verified the case being in order to ensure that they will only hold such ancillary liquid assets as permitted by the CSSF.
AIFs qualifying as Money Market Funds are also subject to the same interpretation and clarifications on ancillary liquid assets as described by the CSSF in its updated FAQs.
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The contents of this informative message are the result of the free interpretation, evaluation and appreciation of Pharus Asset Management SA and constitute simple food for thought.
Any information and data indicated have a purely informative purpose and do not in any way represent an investment advisory service: the resulting operational decisions are to be considered taken by the user in full autonomy and at his own exclusive risk.
Pharus Asset Management SA dedicates the utmost attention and precision to the information contained in this message; nevertheless, no liability shall be accepted for errors, omissions, inaccuracies or manipulations by third parties on what is materially processed capable of affecting the correctness of the information provided and the reliability of the same, as well as for any result obtained using the said information.
It is not permitted to copy, alter, distribute, publish or use these contents on other sites for commercial use without the specific authorization of Pharus Asset Management SA.
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