Undertakings For 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.

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.

Developments in relation to risk management for European investment funds

This paper gives an overview of the recent developments in liquidity risk management for investment funds through the example of measures applicable to funds domiciled in Luxembourg. The paper first outlines the current context regarding risk management, with a focus on liquidity risk management. It then presents risk-management requirements to the undertakings for collective investment in transferable securities (UCITS) and alternative funds. Next, the paper discusses liquidity risk management with consideration of its legal definition and management practices and the need to address such risks at each stage of the life of the fund (design stage, postlaunch stage and stress testing through the funds’ activity). This study is based on the frame set by EU (European Union) law provisions, such as the UCITS Directive or The Alternative Investment Fund Managers Directive, and national Luxembourg legislation, including Luxembourg’s regulatory implementation of international standards such as The International Organization of Securities Commissions (IOSCO) Recommendations on liquidity risk management. This paper further outlines the important role of the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (the CSSF), which has been proactively developing at a very early stage a strong administrative practice to ensure that liquidity risk-management processes meet the required standards in order to promote a sound and prudent fund financial situation. Therefore, the authors recommend strongly that the risk-management system of each relevant market player be checked for compatibility with the IOSCO recommendations and, where appropriate, with the CSSF Circular 19/733. They also stress the importance of adequate stress testing on risks related to liquidity to prepare for volatile times such as the current situation with the global pandemic coronavirus disease-2019 (COVID-19).

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.

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.

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.

Assessing the potential impact of the AIFMD on the UCITS industry: Threat or opportunity?

This year has been momentous for the European fund industry, being marked by two milestone events: the 25th anniversary of the first Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the implementation of the Alternative Investment Fund Managers Directive (AIFMD). In the aftermath of the financial crisis of 2007–08, the aim of the European legislators when they drafted the AIFMD was to better monitor systemic risk and enhance investor protection; more specifically, they meant to regulate hedge funds and private equity funds that were blamed for allegedly spurring the financial turmoil. Ultimately, however, the AIFMD covers managers of all funds that are not UCITS. In other words, the European fund industry is now structured around two directives: UCITS and AIFMD. In fact, the AIFMD was designed as a complement to the UCITS Directive and its drafting was largely benchmarked against the UCITS rules. This paper proposes to examine the similarities and differences between these two directives and assess to what extent the new AIFMD might impact the UCITS industry.

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.

ESMA earns strong credentials thanks to its convincing approach concerning ETF regulation

Exchange traded fund (ETF) regulation was brought on the agenda of the European Securities and Markets Authority (ESMA) less than six months after its creation. On this occasion, the new authority demonstrated a strong commitment to maintaining the unity of the Undertakings for Collective Investment in Transferable Securities (UCITS) legal framework. The Guidelines on ETFs and other UCITS issues published in late 2012 did not create any specific regulation for ETFs. They regulate the use of the name ETF by UCITS, thus creating a UCITS ETF brand which brings clarity to investors. Moreover, ESMA quickly stated its neutrality concerning the two replication techniques used in the ETF world and recognised that physical ETFs and synthetic ETFs bore equivalent risks. In focusing its analysis on collateral diversification and counterparty risk, ESMA broadened the debate to the whole sector of UCITS funds. In particular, the Guidelines regulate securities lending at the European level, a practice which was formerly subject to various provisions in several member-state regulations. Finally, ESMA set out criteria that should be respected by financial indices in which UCITS invest. By doing so, the authority will prompt some ETFs indexed on strategy indices or ‘smart beta’ indices to qualify themselves as ‘actively managed ETFs’. In the meantime, the narrowed definition of a market index in the European regulation will block any attempt by alternative managers to misuse UCITS rules by exploiting their loopholes.

Regulation of exchange traded funds as part of ESMA guidelines implementation: Operational costs and requirements for exchanges

After the 2008 financial crisis, European financial regulators began to scrutinise heavily all areas of financial services. That scrutiny eventually extended to the exchanged traded fund (ETF) industry, led by The European Securities and Markets Authority (ESMA). As relatively new financial products that had seen dramatic growth over the last decade, ETFs were perhaps due some level of review. After 18 months of investigation and consultation with industry, ESMA published its consolidated Guidelines On ETFs and other Undertakings for Collective Investment in Transferable Securities (UCITS). These guidelines do not introduce any radical changes to the ETF industry, but rather focus on increasing transparency and disclosure for both ETFs and more traditional UCITS funds. The guidelines address and introduce new rules for (among other things) UCITS ETF naming conventions, efficient portfolio management techniques, securities lending, eligible financial indices, and collateral management. This paper provides a brief outline of the guidelines and looks at a few of the requirements from the perspective of an ETF provider.

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.

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.

UCITS IV nuts and bolts: What to expect under the new regulatory regime

This paper focuses on the upcoming changes to Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. It covers in detail each of the key modifications introduced by UCITS IV. These include: the Key Investor Information Document, the full Management Company Passport, the new notification procedure, the Master–Feeder structure and Fund Mergers. The approach of this paper is to take each of the key modifications and cover in detail the impact it will have on asset managers.

Cross-border fund distribution operations: Making investment funds easily accessible to global investors — A wake up call

This paper looks at the disappointing progress made in terms of processing efficiencies in the cross-border funds industry despite more than a decade of heavy investment in this field. It aims to identify the main reasons why so little progress has been made over these years, why so many Undertakings for Collective Investment in Transferable Securities (UCITS) funds’ investors and distributors have not embraced the automation solutions that they were offered and what the risks for the UCITS industry could be if it does not improve the way UCITS funds are accessed by their global and diverse investor base. The paper aims to challenge the way the industry has tackled this problem until now and proposes new options and ways to solve the automation challenge faced by the industry.

Risk management challenges in UCITS III funds

With the Circular 07/308, the Commission for the Supervision of the Financial Sector (CSSF) aims to provide undertakings for collective investment in transferable securities (UCITS) with rules of conduct to be followed at the time of the implementation of their risk management structure, and with rules for the coverage and daily valuation of over-the-counter (OTC) derivatives. A sound risk management process requires active involvement of the conducting officers and the board of directors of the UCITS, or of its management company, and the Circular defines the roles and responsibilities of these persons. The effectiveness of the risk management process depends on the existence of a proper risk management framework, including: risk governance; risk assessment; quantification and aggregation; monitoring and reporting; and control optimisation.This paper describes how to implement such an efficient risk management framework. It provides a number of items for consideration by risk officers, conducting officers and directors for each phase of the risk management framework, and enables them either to implement their framework properly or to challenge their existing one.

Venture Capital Funding for Biotech Pharmaceutical Companies in an Integrated Financial Services Market: Regulatory Diversity within the EC

Biotechnology is one of the key emerging technologies and exemplifies the major problems of innovative industrial activity in Europe. Europe lags behind the US in most indicators of economic performance in biotechnology, one major problem being the availability of venture capital. Access to finance proves crucial for an optimal economic performance of biotech firms. However, information asymmetries between new biotech firms and potential investors lead to financing constraints in debt and equity markets. This is where venture capital funds have to overcome problems that markets fail to solve. As far as the European approach to financing small and medium-sized enterprises in the biotechnology field is concerned, attempts are illustrated to mimic allocative effects of capital markets in support of venture capital in Europe. Strategies of down-side protection, upside leverage, and support for the fund's operating costs on the basis of various programs, such as the Innovation and Technology Equity Capital (I-Tec) scheme, SOFARIS in France, and Beteiligungskapital fur Technologieunternehmen (BTU) in Germany are discussed, their weakness being that they simply replace the allocative effects of capital markets by lowering the cost of capital, instead of implementing market mechanisms. In contrast, a different approach is taken in the framework of the Risk Capital Action Plan initiated by the special Lisbon European Council in March 2000, aiming at the creation of Europe-wide integrated capital markets. It is shown how an internal market for risk capital presupposes undistorted competition between offerees for risk capital. Therefore, the single passport for issuers to facilitate companies raising cross-border capital as a means to implement such a system of undistorted competition on the basis of Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) seems to lay the basis for such competition. This holds in particular true after the latest amendment of this directive, including management companies in its framework of the single passport. At the same time, a line has to be drawn between the necessary Europe-wide harmonization in the field of investor protection, such as disclosure rules, ensued by the principle of mutual recognition for financial service providers, and interjurisdictional diversity in the field of company laws. This line-drawing problem can be paralleled to a certain degree to the development of the US securities regulation arising from the promoter problem under English law in the late nineteenth century. Overall, harmonization should only go as far as the economic policy agreed upon by the Member States to constitute an internal market reaches. This policy might at times be corrected by market forces imposing more stringent disclosure standards. Only under such conditions can Europe-wide access to capital markets, be ensured, being complemented by interjurisdictional diversity in the provision of company laws. In sum, only on the basis of this regulatory interplay can innovation as exemplified by biotech pharmaceutical companies take hold.