UCITS: Eligibility of financial instruments for UCITS …

1 Eligibility of financialinstruments for Regulation of 8 February 2008 transposing the Directive 2007/16/EC on eligible assets, ESMA Guidelines 2014/937 on ETFs and other UCITS issuesFebruary 2015 Eligibility of financial instruments for Derivative Instrument?Transferable Security? (4)Money Market Instrument? (6)Is the underlying a financial index?Is the underlying an eligible asset?1. Eligible assets for UCITS (5)2. Interest rates3. Foreign exchanges rates/currenciesIs the derivative an OTC derivative?Is it an eligible financial index?Is it sufficiently diversified?1. Individual price movements are sufficiently uncorrelated to not influence the performance of the whole index2. Maximum 20% per component with only one component up to 35%3. If the index is composed of several commodities, sub-categories of the same commodities are considered as the same commodity if they are highly correlatedIs the index a representative benchmark?1. The index measures the performance of a representative group2.

2 It is revised and rebalanced periodically3. Underlyings are sufficiently liquid (possiblity to replicate it if necessary)Is it published in an appropriate manner?1. Sound procedures to collect prices, calculate the index and publish it2. Information provided on a wide and timely basis3. Full calculation methodology and/or components/weights are available free of chargeIs the index subject to an independent valuation?Is the security listed?Is the counterparty subject toprudential supervision?Is the derivative subject to reliable and verifiable valuation on a daily basis?1. Fair value which does not rely on market quotations from the counterparty2. Either market value or value determined by a pricing model using a recognised methodology3. Verification of the valuation: third party independent from the investment manager and with adequate resourcesDoes the derivative not result in the delivery or the transfer of non-eligible assets? bank loans, commoditiesAre the risks adequately captured by the Risk Management Process of the UCITS ?

3 Eligible financial Derivative InstrumentAre the following Eligibility criteria fulfilled?1. Valuation: reliable prices available on a periodic basis derived from issuers or competent investment research2. Information: regular and accurateAre the following Eligibility criteria fulfilled?1. Valuation: accurate, reliable, regular prices (market prices or prices made available by systems independent from issuers)2. Information: regular, accurate and comprehensive1. Normally dealt in on the money market2. Value can be accurately determined at any time3. Liquid (1)Issued or guaranteed by a state issuer/ supranational issuer?Issued by anundertakingany securitiesof which arelisted?Issued orguaranteed byan establishmentsubject toprudentialsupervision?Issuedentities belongingto categoriesapproved bythe CSSF?Issued by a securitisation vehicle which benefits from a banking liquidity line secured by an establishment either:1. Located in the EEA or2. Located in an OECD country belonging to the group of Te n (2) or3.

4 At least investment grade or4. It can be demonstrated by an in-depth analysis on a case-by-case basisIssued by an establishment either:1. Located in the EEA or2. Located in an OECD country belonging to the group of Ten (2) or3. At least investment grade or4. It can be demonstrated by an in-depth analysis on a case-by-case basisEligible Transferable Security or Money Market Instrument EligibleEligible within the trash ratio of 10% (article 41(2)a) of the 2010 law)Not eligibleWhat do the footnotes mean?1. Converted into cash within 7 business days2. Group of Ten: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States3. Presumption of liquidity and negotiability when a transferable security is admitted to an official stock exchange4. Closed-ended funds are considered as eligible transferable securities for UCITS provided that: they comply with the Eligibility criteria applicable to transferable securities they are subject to corporate governance mechanisms (right to vote in the essential decision making processes of the fund, right to control the investment policy) the asset management activities are carried out by an entity subject to national regulation designed to protect investors5.

5 Eligible assets for UCITS (transferable securities, money market instruments , shares/units of UCITS /UCIs, bank deposits, derivatives) 6. financial instruments which have a maturity at issuance up to and including 397 days have a residual maturity of up to and including 397 days undergo regular yield adjustments in line with the money market conditions at least every 397 days have a risk profile which corresponds to that of instruments which have a maturity of up to and including 397 days or are subject to a yield adjustment7. Stock indices or bonds indices not sufficiently diversifed are considered as baskets of equities/bonds (look-through principle does apply)Key Restriction Reminders Single commodity indices are not eligible for UCITS Highly-correlated means that at least 25% of the correlation observations are above 0,8 5%/10%/40% limits are measurable at issuer level whereas the 20% combined limit is measurable at group level The global exposure of a UCITS to financial derivative instruments may not exceed 100% of its net assets The global exposure can be measured using the commitment approach or a VaR method depending on the risk profile of the UCITS In case of Relative VaR, the VaR of a UCITS may not exceed twice the VaR of a reference portfolio In case of Absolute VaR.

6 The VaR threshold fixed by the UCITS on the basis of its investment policy and risk profile may not exceed 20% Borrowings/overdrafts are permitted up to 10% also for investment purpose but only fo a short period of time and not on a recurring basisThere is an embedded derivative in a transferable security or in a money market instrument if1. Some or all the cash flows of the transferable security or money market instrument (host contract) can be modified according to a variable2. Its economic characteristics and risks are not closely related to the ones of the host contract3. It has a significant impact on the risk profile and the pricing of the transferable securityEmbedded derivative should be taken into consideration in the context of articles 42, 43 and 46 of the 2010 law1. Eligibility of the underlying2. Global exposure3. Look-through principle for the purpose of articles 43 and 46 of the 2010 law (diversification rules)4. Risk Management derivativesyesyesnoyesyesnonoyesyesnoyes yesyesyesyesyesyesyesyesyesyesnonoyesnoA re the following Eligibility criteria fulfilled?

7 1. Potential loss limited to the amount paid for purchasing the security2. Liquidity (3)3. Negotiability (3)4. Consistent with the investment objectives of the UCITS5. Risks adequately captured by Risk Management ProcessnoyesyesyesIs the issue or issuer regulated in order to protect investors and savings?1. Information available allowing appropriate assessment of credit risks2. Freely transferableIs it listed on an officialstock exchange or traded on a regulated market?nonoyesAnne Laurent, PartnerRegulatory Compliance Advisory Services+352 49 48 48 phanie Jean, Senior ManagerRegulatory Compliance Advisory Services+352 49 48 48 do the smileys mean?Your contacts(1)yesno1. Investment Management Compliance Services The EU and Luxembourg investment management regulatory frameworks not only provide market players with opportunities but also present compliance challenges. Managing compliance risks while catering various investors expectations is your key we can helpWe provide online access to the IM Compliance WorkbenchTM database IM Compliance WorkbenchTM is a user-friendly web-based database designed to provide our clients with access to a library of investment compliance related documents.

8 It includes: -Product, index and stock exchange analysis; -Technical notes; -Applicable directives, laws, regulations and circulars; -PwC weekly IM Regulatory organise training sessions and bespoke workshopsOur training sessions and workshops are tailored to your company s assist you in the form of ad hoc advice and analysis For Product Developers and/or Investment Managers - We do Eligibility reviews of sophisticated financial products and complex derivative instruments ; - We support your company in the implementation of innovative investment strategies; - We perform comparative analyses to identify the most suitable regulatory environment for your new fund. For Legal Departments -We do prospectus reviews to make sure that (i) all existing risks in terms of wording, format and presentation are identified, remediated and covered, (ii) consistency of the document is increased and the document landscape ( KIID, Sales & Marketing material, homepage information) can be easily aligned, and (iii) we assist in the implementation of new regulatory and market requirements.

9 For Board Members or Conducting Persons -We perform on-going Eligibility reviews of specific assets, stock exchanges or regulated markets for you; -We analyse potential compliance issues; -We perform periodic reviews of fund portfolios given the investment restictions and the Eligibility criteria imposed by the law. For Risk Managers -We perform reviews of risk management processes for complex UCITS funds; -We review operational risk management frameworks; -We support you in the selection and implementation of risk management systems. For Compliance Officers -We interpret regulations applicable to your product and business; -We review your compliance control framework; -We assist you in the selection and the review on investment guidelines monitoring set Luxembourg ( ) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region.

10 It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused global PwC network is the largest provider of professional services in audit, tax and advisory. We re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at and 2015 PricewaterhouseCoopers, Soci t coop rative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Soci t coop rative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member contacts:Anne Laurent, PartnerRegulatory Compliance Advisory Services+352 49 48 48 2131 Dogniez, PartnerRegulatory Compliance Advisory Services+352 49 48 48 Schadeck, Senior ManagerRegulatory Compliance Advisory Services+352 49 48 48 2164 us o