UCITS’ collateral access for clearing “heavily restricted”

UCITS’ collateral access for clearing “heavily restricted”

UCITS funds that are struggling to access collateral to post as margin for cleared OTC derivatives trades should be granted initial margin exemptions for non-cleared bilateral contracts, a European buy-side association insist.

Limits on borrowing, collateral repackaging and use of the repo market by UCITS makes it difficult for them to comply with the European market infrastructure regulation (EMIR), which requires OTC derivatives to be centrally cleared.

The EMIR rules means that buy-side firms will have to post initial and variation margin for the first time, leading market participants to fear a potential collateral shortage when clearing requirements kick in.

Vincent Dessard, regulatory policy advisor at the European Fund and Asset Management Association (EFAMA), said the cumulative impact of OTC reforms would restrict UCITS from having collateral for clearing.

“UCITS funds have to deliver collateral just like any other market participant, but they are the sole market participants that don’t have access to credit capabilities,” he said. “As a result, they are bound to use their own fund assets, leading to a collateral dry out.”

UCITS funds are considered suitable for retail investors and have been established in accordance with successive European Union directives on undertakings for collective investment in transferable securities (UCITS), which can be freely marketed across the member states.

According to statistics provided by Strategic Insight, an Asset International company, UCITS account for 65% of all portfolios across local European and cross-border mutual funds and 79% of assets under management.

The funds have borrowing limits of 10% of net asset value on a temporary basis, and can’t repackage collateral because of restrictions on the use of assets within other sub-funds.

ESMA’s ‘Guidelines on ETFs and other UCITS issues’ released in December last year has also closed the door on the repo market, with regulator stating cash collateral received by a fund could not be used for clearing obligations.

Perry Braithwaite, adviser product regulation at the Investment Management Association (IMA), said as a result, “UCITS funds are heavily restricted in terms of where they are going to get their collateral from”.

“It’s something that we have raised with the European Commission and ESMA, but don’t know what the outcome is going to be.”

Braithwaite said UK-domiciled funds weren’t as affected as others in Europe, as they were less likely to use repos or OTC derivatives.


EFAMA’s Dessard said the association had also been in touch with ESMA and the International Organisation of Securities Commission (IOSCO), which is currently working on margin requirements for non-cleared OTC derivatives trades that are set to be published by late-August.

He is calling for IOSCO to give funds an exemption on posting initial margin for bilateral trades.

“We are very well aware that there will be changes in the market. We do welcome them in terms of safety, but we are very much under the impression that institutions investors, especially funds, were not taken into account with all the rules that are being prepared and set in place.”

Dessard said if nothing were done, asset managers would shift to “streamlined, plain vanilla instruments”.

“They will no longer finance growth in Europe and small and medium enterprise development,” he said.


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