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Esma publishes repo guidelines for Ucits
04 December 2012
Esma’s final guidelines on repo and reverse repo state that the full amount of assets or cash must be able to be recalled at any time
The European Securities and Markets Authority (Esma) has published its final guidelines on repo and reverse repo agreements for Ucits funds following the results of its consultation in the summer.
The guidelines state that Ucits should only enter into these agreements if they can recall the assets or full amount of cash at any time.
The final guidelines differ from the European regulator’s consultation where it proposed to “allow a proportion of the Ucits to be non-recallable at any time at the initiative of the Ucits”.
Esma now says that repo and reverse repo agreements that do not exceed seven days should be considered as arrangements where assets can be recalled at any time by Ucits. This is an extension from the original proposal where Esma said only overnight repos or overnight reverse repos should be subject to recallability of assets or cash.
Rather than impose a limit on the percentage of a fund’s assets that could be subject to repo and reverse repo on terms that do not allow the assets to be recalled, Esma decided to put a limit on the maturity of the arrangement.
Esma has also decided to allow cash in a reverse repo transaction to be recallable on a mark-to-market basis and not only on an accrued basis in response to recommendations by shareholders. If cash is recallable on a mark-to-market basis, Ucits should also value the reverse repo agreement on the same basis.
One respondent to the consultation said repayment of cash on an accrued basis would mean that all reverse repos other than overnight reverse repos would not comply with the requirement of recallability of the assets at any time.
Respondents also called for Esma to revise the reinvestment of cash received from repo and to allow it to be used to clear OTC transactions. This is still yet to be decided under the collateral guidelines for clearing of OTC derivatives in the European Markets and Infrastructure Regulation (Emir).
The guidelines will now be translated into all EU languages and will be incorporated into Esma’s guidelines on exchange-traded funds (ETFs) and other Ucits issues which were published in July.