2010
Guidance Note 1/96
Guidance Note 1/96 Permitted Markets for Retail Collective Investment Schemes October 2010
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Guidance Note 1/96
Contents 1. Regulatory Criteria
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2. Listing of stock exchanges and markets in documentation
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3. Emerging Markets
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Appendix 1
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Guidance Note 1/96
Guidance Note 1/96 Permitted Markets for Retail Collective Investment Schemes 1
Retail collective investment schemes ("CIS") authorised by the Central Bank of Ireland ["the Central Bank"] are permitted to invest no more than 10 per cent.2 of net assets in securities which are not traded on a stock exchange or other regulated market3.
Regulation 45 of the UCITS Regulations, 2003 sets down the criteria required for securities markets.
Those criteria require that the market be regulated, operate
regularly, be recognised and open to the public (“the regulatory criteria”). (See Section 1.)
Regulation 45 is amended in the UCITS (Amendment) Regulations 2003 inter alia to,
include reference to regulated markets within the meaning of Article 1(13) of Council Directive 93/22/EEC (the Investment Services Directive4; and
to provide for investment in financial derivative instruments ("FDI") which are dealt in on a regulated market.
Each of the stock exchanges and markets listed in the prospectus of a CIS must meet with the regulatory criteria. A CIS must confirm to the Central Bank, in writing, that this is the case. (See Section 2.) A CIS must regularly review the stock exchanges and markets on the list to ensure that they continue to meet with these regulatory criteria.
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UCITS and non-UCITS CIS which market to the public other than those authorised as a) Professional Investor Schemes under Notice NU 12 b) Qualifying Investor Schemes under Notice NU 24
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This is without prejudice to the ability of certain retail schemes to establish as venture capital schemes or property schemes. Moreover retail schemes are also permitted to invest in certain money market instruments and in units of other open-ended collective investment schemes which are not required to be traded on a stock exchange or other regulated market.
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These provisions are set out in Regulation 45 of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 and Paragraph 1, NU 13, in the Central Bank’s NU series of Notices (Collective Investment Schemes other than UCITS).
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See http://europa.eu.int/comm/internal_market/en/finances/mobil/isd/index.htm
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Guidance Note 1/96
1.
Regulatory Criteria The following clarifications are designed to assist a CIS in its assessment of whether a proposed stock exchange or market (the term “market” is used throughout this section) meets with the regulatory criteria.
Interpretation of Criteria Regulated: The market must be regulated. Such a market is subject to supervision by an authority or authorities, duly appointed or recognised by the state in which it is located. The authority(ies) should generally have the power to impose capital adequacy rules, to supervise directly members of the market, to impose listing standards, to ensure transparency in dealings and to impose penalties where breaches of rules or standards occur. The clearance and settlement system for transactions should also be regulated and should have acceptable settlement periods.
Recognised: The market must be recognised or registered by an authority or authorities, duly appointed or recognised by the state in which it is located. Investment in the market by locally based retail collective investment schemes should be permitted by the relevant authorities.
Operating Regularly: Trading must take place with reasonable frequency and the market should have regular trading hours. The assessment must have regard to liquidity in the market, including the number of members/participants, and the ability of the market to provide fair prices on an ongoing basis. Custody arrangements should also be satisfactory i.e. a trustee must be satisfied that it can provide for the safe-keeping of the assets of a CIS in accordance with the conditions set down by the Central Bank (ref: UCITS 4, NU 7).
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Open to the public: The market must be open to the public.
The public should have direct or
indirect access to the securities traded on the market. The degree to which overseas investors are permitted to invest and any rules which may impede the repatriation of capital or profits must be taken into account.
The above list is not exhaustive and the assessment should include a general overview of the market, having particular regard to issues, not mentioned above, which would be relevant to the operation of the market and investment therein.
2. Listing of stock exchanges and markets in documentation Constitutional document The stock exchanges and markets (including derivative markets), on which investment assets of the CIS are listed or traded may be specified in the constitutional document of the CIS.5
Alternatively, the constitutional document must incorporate the following: “With the exception of permitted investments in unlisted securities, the CIS will only invest in those securities and derivative instruments listed or traded on a stock exchange or market (including derivative markets) which meets with the regulatory criteria (regulated, operate regularly, be recognised and open to the public) and which is listed in the prospectus.”
Prospectus The prospectus must outline where a CIS will invest, indicating the countries or regions where investments will be made. Where it is intended to seek exposure to a country or region through investment in companies/instruments listed or traded on stock exchanges or markets located in other jurisdictions, this should be disclosed.
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In accordance with Regulation 45 of the UCITS Regulations, paragraph l, UCITS 9 of the UCITS Notices and paragraph l, NU 13 of the NU series of Notices.
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The prospectus will also include a list6 of those stock exchanges and markets on which investment assets of the CIS are listed or traded. Only those stock exchanges and markets which meet with the regulatory criteria, at the date of the prospectus, may be included in the prospectus.
A list of the regulated derivatives markets must also be included in the prospectus7.
Authorisation procedures8 A CIS9 must confirm to the Central Bank, in writing, that each stock exchange and market listed in the prospectus, or which will be listed in the prospectus in the future, is regulated, operates regularly, is recognised and open to the public. Confirmation is not required in respect of those stock exchanges and markets listed in Appendix l.
A trustee must review the list of stock exchanges and markets in the prospectus to ascertain if it can provide, at the date of the prospectus, for the safe-keeping of the assets of a CIS, which may be traded on these exchanges or markets, in accordance with the conditions set down by the Central Bank (ref: UCITS 4, NU 7, paragraphs 16-17). If the trustee cannot provide custody in accordance with
these
requirements
it
must
consult
with
the
management
company/investment company in order that the relevant exchanges or markets be removed from the list.
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Stock Exchanges in the European Economic Area, Australia, Canada, Hong Kong, Japan, New Zealand, Switzerland and the United States need not be listed individually.
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Derivative markets in the European Economic Area need not be listed individually
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The Central Bank’s Notices UCITS l and NU 4 set down information and documentation requirements in support of an application for authorisation. These Notices will be amended in due course, to reflect the requirements to provide letters of confirmation regarding stock exchanges and markets.
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This should be provided by the directors in the case of an investment company, management company in the case of a unit trust or common contractual fund and general partner in the case of an investment limited partnership.
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A trustee must confirm to the Central Bank, in writing, that it can provide for the safe-keeping of the assets of a CIS, in relation to each of the stock exchanges and markets provided for in the prospectus, in accordance with the conditions set down by the Central Bank (ref: UCITS 4, NU 7, paragraphs 1617). This letter must accompany the initial application for the CIS.
Ongoing review requirements A CIS must keep the list in the prospectus under review to ensure that the stock exchanges and markets continue to meet with the regulatory criteria.
A CIS may update the prospectus from time to time to include additional stock exchanges from the list in the constitutional document, as they meet with the regulatory criteria. A CIS must consult with the trustee to ensure that adequate custody arrangements are in place before including additional stock exchanges or markets in the prospectus. A letter from the trustee, confirming that it can provide for the safe-keeping of the assets of a CIS, in accordance with conditions set down by the Central Bank (ref: UCITS 4, NU 7, paragraphs 1617), must accompany the notification from the CIS to the Central Bank in relation to the prospectus update.
A trustee must ensure that a CIS keeps the list of permitted stock exchanges and markets in the prospectus under review to ensure that the markets meet with the regulatory criteria on an ongoing basis.
Generally the Central Bank will not comment, and will not impose any restrictions, on organised stock exchanges included in the prospectus but may request a CIS to demonstrate due diligence in respect of one or more of those stock exchanges.
The Central Bank may require a presentation to justify the inclusion of markets, other than organised exchanges, in the prospectus. Submissions requested by the Central Bank in respect of a proposed market should take full account of the factors outlined in Section 1. The Central Bank may prohibit the inclusion of,
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or impose restrictions on, a proposed market which it believes does not adequately fit the regulatory criteria.
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Emerging Markets A CIS which invests in emerging stock exchanges and markets is required to recommend, in a prominent manner, that investors should not invest a substantial proportion of their investment portfolio in the CIS.
This risk
warning, which should be set out in bold type at the beginning of the prospectus, must cross reference to the more detailed disclosure of risk factors which are contained in the body of the prospectus.
Financial Institutions and Funds Authorisation Central Bank of Ireland October 2010
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Appendix 1 to Guidance Note 1/96 Permitted Markets for Retail Collective Investment Schemes The following stock exchanges and markets may be listed in a prospectus without a requirement to confirm to the Central Bank that they are regulated, operate regularly, are recognised and open to the public. Stock Exchanges (i)
All stock exchanges in a Member State of the European Union:
(ii)
All stock exchanges in the remaining Member States of the European Economic Area (EEA), (Norway, Iceland and Liechtenstein):
(iii)
A stock exchange located in any of the following countries: Australia Canada Japan Hong Kong New Zealand Switzerland USA
Markets -
Derivative markets approved in a Member State of the EEA
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The market organised by the International Securities Markets Association
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The market conducted by the “listed money market institutions” as described in the Bank of England publication “The Regulation of the Wholesale Cash and OTC Derivatives Markets (in Sterling, foreign currency and bullion)
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AIM - the Alternative Investment Market in the UK, regulated and operated by the London Stock Exchange
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The over-the-counter market in Japan regulated by the Securities Dealers Association of Japan
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NASDAQ in the United States
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The market in US government securities conducted by primary dealers regulated by the Federal Reserve Bank of New York
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The over-the-counter market in the United States regulated by the National Association of Securities Dealers Inc. (May also be described as; the overthe-counter market in the United States conducted by primary and secondary dealers regulated by the Securities and Exchanges Commission and by the National Association of Securities Dealers (and by banking institutions regulated by the US Comptroller of the Currency, the Federal Reserve System or Federal Deposit Insurance Corporation))10
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The French market for “Titres de Creance Negotiable (over-the-counter market in negotiable debt instruments)
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EASDAQ (European Association of Quotation)11
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The over-the-counter market in Canadian Government Bonds, regulated by the Investment Dealers Association of Canada.
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Securities Dealers Automated
US OTC markets are deemed to comply with the regulatory criteria because of the regulation of the participants and because of the regulation which applies to securities which are traded OTC, i.e. with some exceptions securities must comply with the provisions of the Securities Act, l933. (Bankers acceptances and commercial paper are exempt from the registration requirements contained in the l933 Act in recognition of the nature of these short-term obligations). Other securities, which are not required to be registered with the US SEC, are not deemed to be traded on a regulated market. It should be noted however that UCITS are permitted to invest in prelisted securities. Certain US Securities known as Rule 144A securities, which are issued with an undertaking to register with the SEC, may fall under this category. Moreover, the limit of 10% on investment in prelisted securities is not applicable to specific Rule 144A securities (ref: paragraph 1(ii), UCITS 9).
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Where a CIS provides for this market in the prospectus, the following wording must be included: “EASDAQ is a recently formed market and the general level of liquidity may not compare favourably to that found on more established exchanges”.
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T +353 1 224 6000
F +353 1 671 6561
www.centralbank.ie
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