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IFIA responds to consultation on the adoption of ESMA’s revised UCITS guidelines (CP 84)

17 October 2014

The IFIA response strongly disagrees with the approach of the Central Bank to apply additional requirements in relation to collateral over and above those required by ESMA. ESMA’s guidelines include a collateral diversification rule such that a UCITS’ basket of collateral must have in aggregate an exposure of maximum 20% of NAV to a single issuer. ESMA’s revised guidelines, published on 1 August 2014, provide a derogation from this 20% collateral diversification rule for government securities. UCITS availing of the exemption should receive securities from at least six different issues, but securities from any single issue should not account for more than 30% of the UCITS’ NAV. In CP 84 the Central Bank is proposing to implement ESMA’s revised guidelines by including additional criteria relating to “high quality” collateral. Furthermore, a UCITS availing of the derogation would need to deploy “additional resources” to a more frequent and more detailed re-assessment of collateral issuers “who constitute more than 20% of the collateral of a UCITS”. Where there is evidence of deteriorating credit quality of collateral held, the UCITS would be required to put an action plan in place that prioritises “reduction of its exposure to any collateral counterparty who represents more than 20% of the collateral held”.

The IFIA response rejects the Central Bank’s proposed additional requirements on the basis that: 

• Existing requirements in relation to collateral sufficiently address the Central Bank’s concerns 

• ESMA has already given extensive consideration to UCITS collateral requirements and finalised its revised rules 

• They are of an impractical and subjective nature

• They are disproportionate and potentially damaging to counterparty trading arrangements 

• They are contrary to investors’ best interests

• They follow on from very recent regulatory changes to collateral requirements, all of which require significant operational investment 

• They do not respect the need for a level playing field and consistency across UCITS

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