“Frequently Asked Questions” on the Law of 17 December 2010 and on the Money Market Fund Regulation
Summary
On 3 November 2021, the CSSF published updated Frequently Asked Questions (“FAQs”) clarifying the circ*mstances and the extent to which Undertakings for Collective Investment in Transferable Securities (“UCITS”) are allowed to hold ancillaryliquid assets and bank deposits as well as some guidance on the diversification rules applicable to those assets for Money Market Funds (“MMFs”) and UCITS.
Key points
Scope of ancillary liquid assets
According to the CSSF, ancillary liquid assets should be limited to bank deposits at sight, such as cash held in current accounts with a bank accessible at any time. The rationale for holding such assetsng to the CSSF, ancillary liquid assets should be limited to bank deposits at sight, such as cash held in current accounts with a bank accessible at any time. The rationale for holding such assetsshould be to cover current or exceptional payments, or, for the time necessary before reinvesting in eligible assets, or for a period of time in case of unfavorable market conditions.
The CSSF also clarified that bank deposits, money market instruments and money market funds qualifying as eligible assets for a UCITS should not be included in the ancillary liquid assets. Other money market instruments may also constitute eligible investments for a UCITS under the trash ratio. Initial and variation margins relating to financial derivatives should be considered as collateral received or posted and not as bank deposits or ancillary liquid assets.
Exceptional breaches
The 20% limit for such assets in UCITS can only be temporarily breached for the minimum time necessary where such breach is justified having regard to the interests of the investors, for instance in severe circ*mstances such as the 11 September attacks or the bankruptcy of Lehman Brothers in 2008.
Consistency with the UCITS investment policy
A UCITS must clearly disclose in its investment policy the categories of eligible assets in which it is authorized to invest:
• In order to achieve its investment goals
• For treasury purposes
• In case of unfavorable market conditions
If a UCITS invests in a category of assets that is not foreseen in its investment policy, the provisions of Circular CSSF 02/77 apply.
UCITS diversification rules
The 20% limit applicable to deposits must be applied to ancillary liquid assets since they are limited to deposits at sight with banks. This limit equally applies to margin accounts, however, in order to avoid undue exposure to a single body, margin accounts must be taken into consideration in the 20% global limit applicable to an issuer. In addition, margin accounts may be subject to the 5%/10% limit on OTC counterparty risk.
MMF diversification rules
Since ancillary liquid assets are limited to deposits at sight with banks, the 10% limit applicable to deposits with the same credit institution applies to ancillary liquid assets. The maximum holding of ancillary liquid assets by a MMF is limited to 20% of its net assets.
Practical considerations
In a context of market stress which may delay certain investment/ divestment operations and may trigger investor runs, the CSSF clarifications bring welcome certainty on the interpretation of rules related to holding of ancillary liquid assets.
UCITS, MMFs and their managers should make sure their investment compliance, escalation and governance processes are fully aligned with the CSSF rules at the earliest opportunity.
