Ewa Kozlowska-Sugar explains what the new UCITS rules will mean for investors and asset managers and how they will contribute to safer EU capital markets.
Investing in UCITS funds (Undertakings for Collective Investment in Transferable Securities) should now be even more secure thanks to new rules that took effect on 18 March. The rules focus primarily on remuneration of asset managers, keeping assets safe and improving sanctions. Here, Ewa Kozlowska-Sugar, asset management legal expert at the European Commission, explains what these rules are about, what they mean for investors and asset managers and how they will contribute to safer EU capital markets.
Keeping assets safe
UCITS funds now have some € 9 trillion of assets under management and account for around 75% of all collective investments by small investors in Europe. One third of investors in UCITS are retail clients. However, even the remaining two thirds held by institutional investors, such as pension and insurance companies, are ultimately invested for the benefit of the general public. UCITS funds offer EU investors safe and easy access to savings in shares, bonds and other similar types of financial instruments from around the world. These assets are then held, not by the fund itself, but by separate and specialised companies (usually banks) known as depositaries. Depositaries have to maintain control over these assets and protect them, even if they are kept in accounts in non-EU banks. Depositaries are also responsible for making sure fund managers' activities are in line with all relevant rules. This role as an independent watchdog ensures that managers act in the best interest of funds and their investors.
The standard of protection of these assets has now been harmonised across the EU by setting uniform requirements for depositaries and their liability towards investors for any assets that are lost. If something goes wrong and assets held by the depositary – or any other institution involved in the investment chain – are lost, the depositary must replace them as soon as possible with assets of the same type or value. The new rules should see small investors' confidence boosted by a ban on the use of their assets for any other purpose than the UCITS investors' benefit. For example, an intermediary will not be allowed to temporarily use assets belonging to UCITS for the purpose of its own transactions.
Remuneration policies and sanctions
The rules also set out clear and transparent remuneration or pay policy standards that must be applied to UCITS managers. Basically, the aim is to avoid managers taking excessive risks that are not in the investors' interests.
The amended rules harmonise the minimum administrative penalties that can be applied for breaches of UCITS rules by depositaries or fund managers. Small investors will now know that supervisors apply the same minimum standards for enforcing UCITS rules as in other financial services regulations. Member States will also have to set up reliable mechanisms to make it easier to report infringements of the new rules. The European Securities and Markets Authority (ESMA) will set up secure communication channels, which must guarantee full confidentiality and data protection for whistle-blowers.
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FAQs
An Undertaking for Collective Investment in Transferable Securities (UCITS) is an investment fund that invests in liquid assets and can be distributed publicly to retail investors across the EU.
What is UCITS in finance? ›
UCITS stands for "undertaking for collective investment in transferable securities”. This means it is an undertaking for collective investment which invests in securities, i.e. in stocks, bonds, short term treasury instruments and cash.
What is the difference between UCITS and ETFs? ›
For ETFs using derivatives, exposure should be covered with collateral valued at 90% of NAV and meet minimum risk management standards. UCITS funds cannot use leverage other than on a temporary basis and up to a maximum of 10% of their NAV.
What is the 5 10 40 rule for UCIT funds? ›
No single asset can represent more than 10% of the fund's assets; holdings of more than 5% cannot in aggregate exceed 40% of the fund's assets. This is known as the "5/10/40" rule.
What is the difference between UCITS and mutual funds? ›
What Does UCITS Mean In Stocks? Undertaking for collective investment in transferable securities (UCITS) is a regulatory framework for mutual funds in the European Union (EU). It governs how mutual funds are sold and managed.
What are the disadvantages of UCITS funds? ›
Costs: UCITS funds can have higher costs due to compliance and regulatory reporting requirements. Investment restrictions: Strict investment rules might limit the fund's ability to take advantage of certain market opportunities.
How to tell if a fund is UCITS? ›
A UCITS must invest its funds in transferable securities and other liquid assets. This includes transferable securities admitted or dealt on a regulated market, investment funds, financial derivative instruments, cash and specific money market instruments.
Can Americans invest in UCITS? ›
You can purchase UCITS funds through a U.S.-based fund manager. That said, only an authorized EU-based management company can oversee that fund. So a U.S. fund manager either must set up such a company or partner with one.
Is Vanguard a UCITS? ›
Vanguard S&P 500 UCITS ETF (VUSA)
The Fund employs a “passive management” – or indexing – investment approach, through physical acquisition of securities, designed to track the performance of the Index, a free float adjusted market capitalisation weighted index.
Is UCITS a hedge fund? ›
Despite fees on many UCITS funds being similar to traditional hedge funds, data from investment firm Aurum show the latter to be more effective in handling larger volumes of assets at higher Sharpe ratios — a measure of a fund's returns against its level of risk.
A UCITS may acquire no more than 25% of the units/shares of the underlying UCITS or UCI (or the aggregate amount invested in one or more sub-funds of an umbrella UCITS). 2. Such UCITS or UCI cannot itself invest more than 10% in other UCITS or UCIs.
How are UCITS priced? ›
NAV and UCITS valuation
The sale or purchase price for a UCITS fund is determined by the Net Asset Value per share or NAV. NAV is equal to the net assets of the fund divided by the number of shares or units held by investors so pricing and valuation of the assets are clearly important.
What is the 35/20 rule for UCITS? ›
However, index-tracking UCITS can employ the 20/35 rule, whereby they can invest up to 20% of assets into securities from the same issuer, with this limit being raise to 35% in exceptional market conditions.
Are sicav and UCITS the same? ›
SICAVs are often contrasted with SICAFs. SICAFs are similar to closed-end funds in the U.S. SICAFs are an acronym for Société d'Investissem*nt à Capital Fixe. They are traded on public market exchanges and operate with a fixed number of shares. UCITS structured SICAVs are actively cross-border marketed in Europe.
How do UCITS work? ›
A UCITS may invest in a financial index (using a derivative, such as a swap) or invest in a structured products known as “structured financial instruments” or “SFIs” which can be classified as a transferable security to gain indirect exposure to commodities.
Who invests in UCITS funds? ›
Any person may invest in a UCITS fund. UCITS funds are a highly popular form of investment, especially for European retail investors. While they may be offered worldwide, they're especially popular with Europeans making smaller investments.
What is the benefit of UCITS? ›
The advantages of UCITS ETFs
Trading UCITS ETFs is often a popular choice due to the advantages that these funds offer. For one, investors enjoy added risk protection due to stringent rules on fund management, diversification, service provider administration and protection of assets.
What is the difference between a Sicav and a UCITS? ›
SICAFs are similar to closed-end funds in the U.S. SICAFs are an acronym for Société d'Investissem*nt à Capital Fixe. They are traded on public market exchanges and operate with a fixed number of shares. UCITS structured SICAVs are actively cross-border marketed in Europe.
