The European Securities and Markets Authority has made its opinion clear on Article 50(2)(a) of the UCITS Directive, the so-called “trash ratio”, which permits UCITS to invest up to 10 percent of their net assets in transferable securities and money market instruments, other than the eligible assets referred to in Article 50(1).
Esma stated that questions had emerged about: “whether the derogation…applies to units or shares of collective investment undertakings."
"??Regulators including the Central Bank of Ireland and the CSSF in Luxembourg have interpreted Article 50(2)(a) as permitting UCITS to invest in unregulated investment funds, including hedge funds, provided the investment complies with the eligibility criteria for UCITS; hedge funds that redeem units at the request of unitholders and operate on the principle of risk spreading," ??said law firm Dechert LLP in a legal update. ??
Esma, however, states that Article 50(2)(a) refers only to investments in transferable securities and money market instruments, not to units or shares of collective investment undertakings.??
"As a result, ESMA considers that UCITS may only invest in collective investment undertakings that fall within the meaning of Article 50(1)(e), meaning other UCITS, or alternatively, funds that are subject to equivalent supervision as UCITS and which provide an equivalent level of investor protection as UCITS,” added Dechert LLP. ??
“In order to comply with the opinion, UCITS that have investments in hedge funds will be expected to redeem such holdings "taking into account the best interests of investors and at the latest by 31 December 2013". It will be interesting to see whether national regulators look for earlier compliance than the 31 December 2013 deadline.”
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