Collective Investment In Transferable Securities Research Articles

The co-evolution of sustainable finance stakeholders under the EU taxonomy for sustainable activities: an exploratory study of Irish disclosure experiences

Purpose In pursuit of objectives, under the European Green Deal, to channel capital flows to sustainable activities, the EU Taxonomy offers clarity, labelling real economic activities as “sustainable”, based on technical screening criteria. This study of disclosure experiences aims to explore the role of co-evolutionary relationships in the Taxonomy’s effectiveness. Design/methodology/approach Co-evolution theory implies a dynamic interplay among sustainable finance stakeholders (SFSs), through adjustment to, impact on and operationalisation of the Taxonomy. Corporate disclosure experiences, including those of financial institutions and related SFS experiences, may reveal co-evolutionary processes. With significant Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), Irish SFSs provide contextual insight. Semi-structured interviews with a purposive sample of Irish SFSs capture inaugural corporate Taxonomy disclosure experiences. Findings A thematic analysis reveals six co-evolutionary processes that facilitate Taxonomy implementation in pursuit of policy objectives: [1] cross-functional reporting; [2] iterative pre-empting and addressing compliance issues; [3] regulation as a catalyst for co-evolution; [4] advanced capacity building; [5] stakeholder adaptation and [6] graduated use of ESG data. Implications for sustainability policy development and management are significant. Practical implications Whilst limited to just one EU jurisdiction, given limited prior empirical evidence for sustainable finance regulations from co-evolutionary perspectives, this study highlights a catalytic, yet precautionary role for co-evolution in their transformation effectiveness. As such, they must take account of their potential to stimulate co-evolution and to nurture it in pursuit of their policy objectives. Social implications The findings of this study add to a small, but growing body of academic literature on the Taxonomy Regulation, which suggests that a co-evolutionary lens is important for gaining a comprehensive understanding of its early-stage dynamics. From an implementation perspective, the qualitative data reveals actionable implications for regulators and policymakers, such as building capacity, better anticipation of outcomes and investment in data infrastructure. Originality/value Unlike existing analyses of disclosures, this study offers a co-evolutionary lens on Taxonomy contributions to sustainable development through qualitative accounts.

Trust Matters in the Single Market, but How? Analysing Trust Amongst European Financial Supervisors

AbstractEuropean regulatory co‐operation has become essential for the smooth operation of the single market, and this in turn requires trust. In the case of the European Union (EU) ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS) Directive, for example, the member states' financial supervisory authorities rely on each other to provide a harmonised regime for the sale of investment funds across the EU. Funds authorised in one member state can be sold freely in another member state without further authorisation. The national authorities need to trust each other to ensure a consistent application of EU law. Yet we know very little about how trust matters from the perspective of member state regulators. In this article, we provide a better understanding of the relevant components of trust in the single market in financial services through an in‐depth case study of an EU network of national financial market supervisory authorities.

Luxembourg and Ireland in global financial networks: Analysing the changing structure of European investment funds.

Using a unique database on investment funds and the conceptual framework of global financial networks, this paper examines the spatial structure of the European investment fund industry, with particular focus on Luxembourg and Ireland. Grounded in financial and economic geography, the paper shows how these countries became the leading investment fund domiciles through a mixture of structural factors and agency enabling a fast and flexible implementation of the European Directive on the Undertakings for the Collective Investment in Transferable Securities (UCITS) of 1985, and the cultivation of the investment fund industry ever since. In the process, Luxembourg and Ireland have built on and developed their functions as offshore jurisdictions and international financial centres, both sustained by their governments and regulatory agencies. The analysis of the functional structure of investment funds and their networked geography reveals the increasingly dominant position of London as the investment management centre for the industry, and the increasing concentration of control by large asset management firms. Stripped to its basics, the geography of European investment fund networks is about large, mainly US, asset management firms, creating and managing funds in Luxembourg and Ireland, and investing money through London. As such, the rise of European investment funds can be seen as an example of European financial integration through Americanisation. The Luxembourg and Irish investment fund industry are connected mainly through London and New York, and thus function as satellites of the NY–LON axis, rather than a Luxembourg–Dublin axis in international finance. Overall, the paper demonstrates that studying this seemingly arcane industry, and the role of two small countries in it, reveals much about the nature of financial globalisation.

Creating factor clusters in the alternative Undertakings for Collective Investment in Transferable Securities (UCITS) universe

After years of expansion, the alternative Undertakings for Collective Investment in Transferable Securities (UCITS) market experienced wide fluctuations in performance during the Covid-19 market crisis. Using a novel quantitative process that utilizes Premialab Pure Factors, we identify seven clusters within a universe of 323 alternative UCITS based on their performance and factor characteristics. Investors can gain additional insights into their current or prospective alternative UCITS holdings by observing their performance in the context of the relevant cluster.

The European Regime for Investment through Undertakings for Collective Investment in Transferable Securities in Spain

The European Regime for Investment through Undertakings for Collective Investment in Transferable Securities in Spain

ESMA’s Mission to Integrate ESG Risks and Factors into UCITS and AIFMD: Value Added or Additional Administrative Burden

Environmental, social, and governance (ESG) factors are getting more and more important for the fund industry, not only for the management companies of the funds but also especially for the investors who become more sensitive to these kinds of aspects. This increasing importance has also been recognized by the European Commission, which officially mandated on July 24, 2018, the European Securities and Markets Authority to provide technical advice on how sustainability risks and factors should be integrated in European regulation. This article examines which approach the European Securities and Markets Authority suggests in order to integrate sustainability risks and factors in the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive and how this is seen by the market, as burden or value added, and therefore will be in the interest of UCITS management companies, self-managed UCITS investment companies, Alternative Investment Fund Managers, and their associations and for investors in these products. <b>TOPICS:</b>ESG investing, portfolio construction, portfolio theory <b>Key Findings</b> • ESG factors are getting more important for market players, and there are still a lot of challenges ahead. • ESMA’s initiative was well received from the market and helps to close the gap. • Market participants mainly don’t see this initiative as administrative burden but more a value added.

Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies

Eligible investors seeking factor exposures may have a choice of different investment vehicles to implement an investment strategy, ranging from fully transparent, index-based exchange-traded funds to private funds or undertakings for collective investment in transferable securities. In this article, the authors assess the impact of constraints common to these investment vehicles through the lens of hypothetical equity momentum and value factor strategies. As constraints—leverage, trading frequency, and risk levels—on the factor strategies are relaxed, risk-adjusted potential returns may improve. Conversely, moving from an unconstrained implementation to a low-turnover, long-only implementation may decrease the Sharpe ratios of momentum and value strategies by as much as 60%.

Use of Credit Default Swaps by UCITS Funds: Evidence from EU Regulatory Data

Using a sample of more than 18,000 Undertakings for Collective Investment in Transferable Securities,or UCITS, this paper aims to provide a first overview of the use of credit default swaps by EU UCITSfunds. We show that UCITS funds only account for a small share of the overall EU credit derivativesmarket. The CDS market is highly concentrated, with thirteen large dealers acting as counterparty to thevast majority of CDS transactions that involve UCITS funds. The use of CDS by UCITS is mainlyconcentrated in fixed-income funds and funds that rely on so-called alternative strategies. Funds that useCDS tend to be much larger on average. The analysis also reveals three salient features in the UCITSfunds’ use of CDS. Firstly, funds with directional strategies, such as fixed-income and allocation funds (ormixed funds), are on aggregate net sellers of CDS. Secondly, a large majority of CDS underlyings areindices, from which funds can gain exposure to multiple entities at once within one sector or region.Lastly, most sovereign single-name CDS are written on emerging market issuers, highlighting the rolethat these instruments can play in facilitating access to less liquid markets.

An update on the EU securities financing transactions regulation

PurposeTo provide an update and detailed explanation on the EU Regulation on Transparency of Securities Financing Transactions and of Reuse (“SFTR”).Design/methodology/approachExamines the SFTR, its key measures and requirements.FindingsConcludes with a number of considerations and recommendations. For example, it advises managers of Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) to prepare to disclose details of their use of securities financing transactions and total return swaps.Originality/valueOffers information on the SFTR and explains its requirements and scope. It has been written by a partner at an international law firm.

Does it still make sense, from the EU perspective, to distinguish between UCITS and non-UCITS schemes?

This article aims to discuss the usefulness of the distinction between the categories of Undertakings for Collective Investment in Transferable Securities (UCITS) 1 and non-UCITS schemes, 2 within the regulation of asset management. 3 The purpose is to understand whether this distinction still makes sense after the adoption and the implementation of the Alternative Investment Fund Managers Directive 4 (AIFMD) among the Member States, from the European Union (EU) 5 and UK 6 regulation perspectives. 7 UCITSs are open-ended retail investor funds established according to the provisions of the UCITSD. 8 This Directive represents one of the first initiatives of the EU legislature to create a single market for financial products. In this regard, the Directive harmonized the EU Member States’ internal regulations on the funds and the management companies. In particular, the Directive regulates the working structure of these funds. Accordingly, UCITSs must have a depositary who holds the fund’s assets in order to grant more protection to the investors and a separate management company. The Directive also sets forth some relevant limits of investment and in borrowing in order to protect the retail investors, given that these funds have been created in order to satisfy particularly the needs of these investors. This harmonization represents the legal basis of the European passport regime. The passport is a legal instrument of great importance because it allows the managers of UCITSs to market freely their funds to every kind of investor within the EU territory. This means that these funds may be marketed on a cross-border basis in every EU Member State in the same way as domestic retail funds.

Effectiveness of independent boards of UCITS funds

In order to protect fund investors against conflicts of interest with fund management companies, US funds have mandatory independent directors, but this obligation is not required under the European Union Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. Nevertheless, a considerable number of UCITS funds do have independent directors. Whether independent directors should also be mandatory in Europe has been a topic of ongoing debate. Using a sample of Luxembourg UCITS, we test the hypothesis that more independent boards add value for investors through lower costs and/or better investment performance, but we fail to find supporting evidence, even for funds with a higher risk of conflicts of interest. Oversight by independent depositaries and institutional shareholders does not seem to be effective either. It appears that board attitude and the sponsor distribution model are more important since we find evidence that boards that prioritise cost monitoring have lower costs and that independent sponsor funds have better performance. These results question the effectiveness of self-regulation or formal regulation requiring independent board members.

Romanian Unit-linked Life Insurance Market

This study presents the legislation that regulates the Romanian unit-linked life insurance market. The main document that regulates both the insurance business on Romanian market and the organizing and operating of the Insurance Supervisory Commission (CSA) is Law no.32/2000 on insurance undertakings and insurance supervision, as amended and supplemented, which provides: organizing and operating of insurance, insurance/reinsurance and reinsurance undertakings, of mutual undertakings, as well as of insurance intermediaries; organizing and operating of the CSA; supervision of the insurance and reinsurance undertakings conducting business in or from Romania; supervision of the insurance and reinsurance intermediaries, as well as the supervision of other activities related to the insurance mediation. The legislation which regulates the Romanian insurance market includes: norms issued by CSA; laws and governmental ordinances that regulate the Romanian financial market; CSA draft regulations which are to be submitted to consulting with the players on the market; EU Directives in the insurance field; repealed or no longer in force legislative acts and international sanctions. According to Directive, 2002 /83/EC, unit-linked life insurance products were defined as insurance contracts where the benefits provided are directly linked to the value of units in undertakings for collective investment in transferable securities (UCITS) or to the value of assets contained in an internal fund owned by the insurance undertaking, usually divided into units, or a share index or some other reference value. The financial supervision shall include verification, with respect to the insurance undertaking's entire business, of its state of solvency, the establishment of technical provisions, including mathematical provisions, and of the assets covering them, in accordance with the rules laid down or practices followed in the home Member State pursuant to the provisions adopted at Community level. Each Member State shall require of every insurance undertaking whose head office is situated in its territory an adequate available solvency margin in respect of its entire business. In general the European Union requirements and the national requirements are common for all life insurance products offered by an insurance company and also there is not a very clear distinction between the legislation regarding unit-linked life insurance products and the one regarding traditional life insurance products. Policyholders want to enjoy the benefits of equity investment in conjunction with mortality protection, and insurers have developed unit-linked contracts to meet this challenge. Unit linked insurance products are life insurance policies with investment component. Although some unit-linked contract types pass most of the asset risk to the policyholder and involve little or no investment risk for the insurer, it was natural for insurers to incorporate payment guarantees in these new contracts.

National marketing and product distribution rules for UCITS: a critical analysis

This article examines the development of the notification procedure for passporting in terms of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the internal market concerns that emerge from the application of national marketing rules by the host Member State. As a means to resolve the resulting obstacles to passporting in practice, the paper makes recommendations for a soft-law approach based on reflexive governance of financial supervision, supplemented by a mechanism for transparency. The article also reviews the Markets in Financial Instruments Directive (MiFID) conduct of business rules that apply to investment firms with regard to the distribution of financial products, including the selling of UCITS. It examines the amendments to this field of regulation as proposed in the MiFID II legislative initiative. The article argues that the classification of structured UCITS as a complex product for the purpose of MiFID is likely to have a negative impact on the strength of the UCITS brand.

Independence and focus of Luxembourg UCITS fund boards

Investment funds are potentially plagued by principal-agent problems between investors and fund management companies, in particular with respect to fees. Market forces play a role in mitigating these problems, but based on existing empirical studies, there can be doubts about whether these forces are sufficient for protecting investor interests. When market forces fail, there is room for fund boards to add value for investors. U.S. funds have mandatory independent directors who are empowered to be the watchdogs for the fund investors, negotiating fees with the fund management company on their behalf. This is not the case for Luxembourg funds that are established in accordance with the EU Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. This study uses a sample of Luxembourg UCITS funds and shows that, although there is no regulatory requirement, approximately half of the sample funds have appointed at least one independent board member. A survey among board members of the sample funds showed that, in the absence of the requirement to negotiate fees with the fund management company, Luxembourg boards give relatively low priority to costs, which they see as primarily the responsibility of the promoter, leaving the monitoring to market forces. This finding is irrespective of whether or not the board has (semi-) independent board members.

(Non-)complexity through the eyes of MiFID

The European Commission recently published legislative proposals to reform the Markets In Financial Instruments Directive (MiFID). This note elaborates on the proposed shift in classification of “structured Undertakings for Collective Investment in Transferable Securities (UCITS)”. While MiFID I labeled all UCITS “non-complex”, MiFID II deems all structured UCITS “complex”. We propose a logical and consistent framework to refine this dichotomy and identify a limited number of product types amongst the various kinds of structured investments. The classification is traceable, comprehensible and is proposed as the basis of a “complexity indicator” that surpasses the current generalisation.

The Revised UCITS Directive (UCITS IV): A Missed Chance for Creating Common Rules on the Taxation of UCITS

The taxation of domestic and foreign Undertaking for Collective Investment in Transferable Securities (UCITS) in the Member States differs substantially. These differences in taxation distort the competition between UCITS. The aim of the UCITS Directive therefore could not be fully realized. In this contribution, the desirability of common (harmonized) European Union (EU) rules is reviewed. According to the author, the Member States can eventually not escape from including a chapter on the taxation of UCITS in the Directive, unless they settle for the current incomplete market in UCITS.

Harmonized regulatory standards, international distribution of investment funds and the recent financial crisis

In this paper, we consider for the first time the impact of fund regulation on the international distribution of investment funds. We study the 2001 Undertakings for Collective Investment in Transferable Securities (UCITS) Directive of the European Union, which was put in place to mitigate fraud and promote investor confidence throughout Europe. We examine the impact of UCITS on international distributions of European investment funds over the 2002–2009 period. We show that the UCITS regulatory structure has significantly facilitated cross-border fund distributions, albeit UCITS has had less success in facilitating distributions among smaller fund promoters. Also, UCITS funds, especially UCITS equity funds, have lost some of their advantage in terms of cross-border distribution during the period of the recent financial crisis. Further, we show there has been a growing interest in UCITS over time outside Europe, notably in Asia.

Exploring the influence of regulation on the innovation process

The influence of regulation on the innovation process in the financial services industry is at present an area that is understudied. The Grand-Duchy of Luxembourg provides an interesting case study because it was the first to quickly and effectively transpose a major EU directive for financial services, namely the Undertakings for Collective Investment in Transferable Securities (UCITS) directive. Additionally, no prior study was done on the mechanisms which facilitated a faster innovation process in Luxembourg’s financial services industry. The interplay between the government, professional associations and private actors was studied. A positive influence of this interplay on the implementation of the UCITS directive was found, offering a better understanding of the mechanism of externally induced innovation. The obtained results provide interesting new venues of research and indicate the importance of reputation and the existing mechanisms of relational embeddedness to enhance the innovation process in Luxembourg’s financial services industry.

An Empirical Analysis of U.S. Dollar-Trading Newcits

The present article uses a sample of 66 U.S. dollar-trading undertakings for collective investment in transferable securities (UCITS) to find that the risk-adjusted performance of some strategies (i.e., equity long-biased, FOF, fixed income and sector specific) outperformed the corresponding traditional hedge fund indices over the January 2006 to March 2010 period. However, with the exception of the fixed-income strategy, all other strategies produced a volatility that was higher than that of the index. The funds of funds (FOF) classification had a risk similar to that of the index. More worryingly, during the crisis it appears that some strategies (i.e., emerging markets and equity long/short) delivered a lower risk-adjusted performance than that of their benchmarks. Further evidence shows that sector-specific strategies produced stronger risk-adjusted returns than their benchmarks albeit at a higher cost of volatility. Overall, the fixed income and FOF newcits delivered superior risk-adjusted performance at a lower or comparable risk to that of similar traditional hedge funds.

An Empirical Analysis of US Dollar Trading Newcits

The present paper uses a sample of 66 US Dollar-trading Undertakings for Collective Investment in Transferable Securities (UCITS or sometimes-called Newcits) to find that the risk-adjusted performance of some strategies (i.e., Equity Long-biased, FOF, Fixed Income and Sector specific) outperformed the corresponding traditional hedge fund indices over the January 2006 - March 2010 period. However, with the exception of the Fixed Income strategy all other strategies produced a volatility that was higher than that of the corresponding index. The Funds of Funds (abbreviated FOF) classification had a risk similar to that of the corresponding index. More worryingly, during the crisis it appears that some strategies (i.e., Emerging Markets and Equity Long/Short) delivered a lower risk-adjusted performance than that of their benchmarks. Further evidence shows that Sector specific strategies produced stronger risk-adjusted returns than their benchmarks albeit at a higher cost of volatility. Overall, the Fixed Income and FOF Newcits delivered superior risk-adjusted performance at a lower or comparable risk to that of similar traditional hedge funds.