Esma analysed securities lending during 2013 as part of his revision of guidelines for Ucits funds. Emsa’s objectives of investor protection and financial stability were the key drivers behind its guidelines for Ucits funds.
The guidelines also concerned, among other issues, securities lending and collateral management – requiring Ucits funds provide details to investors of the associated risks and full disclosure of fees deducted from revenue. Also, regarding liquidity, the guidelines recommended that Ucits funds are able to recall securities at any time.
“I would like to stress that the inclusion of these provisions in the guidelines should not be taken as a criticism of securities lending or repo activity by Ucits per se. We recognise that these activities remain a means of managing portfolios and giving benefits to the investor.”
“However, we identified the need to place additional safeguards, taking into account the retail focus of Ucits funds and the need to ensure liquidity.”
Maijoor noted that the guideline on fees was met with “some surprise” by some stakeholders. However, he reiterated that Esma believes it is a “key principle” and in the interests of investors. “There may be merit in carrying out further work in this area in order to monitor the application of this principle.”
He warned the industry that further action would be taken if attempts were made to dodge application of this principle. “There have been some comments saying ‘we can circumvent this high-level principle’ and I fully understand you can be very creative in getting around this principle. But I think it is in the interests of the industry to live by this principle – to avoid the need for further detailed regulation.”
He also is concerned about the level of due diligence among market participants. While he praised Isla for its role in developing master agreements for securities lending he stressed that the existence of such agreements should not lead firms to reduce their own due diligence or pay less attention to back office controls.“We have seen numerous examples of problems arising from lax controls… risk management is crucial.”
Esma’s Ucits guidelines also set out strict rules for the financial indices on which Ucits funds may gain exposure. Increasingly Ucits funds were gaining exposure to indices that, as Maijoor said, are “to all intents and purposes investment strategies wrapped in an index”. Esma took a “clear view” that this is “against the letter and spirit of Ucits”.