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Eligibility of
financial
instruments for
UCITS
Grand-Ducal Regulation of
8 February 2008 transposing
the Directive 2007/16/EC
on eligible assets, ESMA
Guidelines 2014/937 on
ETFs and other UCITS issues

February 2015
 Eligibility of financial instruments for UCITS www.pwc.lu/ucits

Financial Derivative Instrument? Transferable Security? (4) Money Market Instrument? (6)

i.e.
Is the underlying a financial index? no 1. Normally dealt in on the money market
yes 2. Value can be accurately determined at any time
yes no
3. Liquid (1)

Is the underlying an eligible asset? no Are the following eligibility criteria fulfilled? Is the issue or issuer regulated in order
Is it listed on an official
1. Eligible assets for UCITS (5)
no 1. Potential loss limited to the amount paid for purchasing the security to protect investors and savings?
Is it an eligible financial index? stock exchange or
2. Interest rates 2. Liquidity (3) no traded on a regulated no 1. Information available allowing no
3. Foreign exchanges rates/currencies 3. Negotiability (3) appropriate assessment of credit risks
no market?
4. Consistent with the investment objectives of the UCITS 2. Freely transferable
i.e. yes yes 5. Risks adequately captured by Risk Management Process

yes
Is it sufficiently diversified? Is the derivative an OTC derivative? yes
no
1. Individual price movements are
yes
sufficiently uncorrelated to not influence
the performance of the whole index
2. Maximum 20% per component with
no yes yes yes yes
only one component up to 35% Is the counterparty subject to no
no
3. If the index is composed of several prudential supervision? yes
commodities, sub-categories of the
same commodities are considered as Issued or
yes Issued or Issued by an Issued
the same commodity if they are highly guaranteed by
correlated
guaranteed by undertaking entities belonging
an establishment
a state issuer/ any securities to categories
subject to
supranational of which are approved by
Is the derivative subject to reliable and prudential
yes issuer? listed? the CSSF?
verifiable valuation on a daily basis? supervision?
1. Fair value which does not rely on market
quotations from the counterparty yes yes yes yes
Is the index a representative
benchmark? 2. Either market value or value determined no
by a pricing model using a recognised Is the security listed?
1. The index measures the performance methodology Issued by an Issued by a
no of a representative group 3. Verification of the valuation: third party
2. It is revised and rebalanced
establishment securitisation
independent from the investment either: vehicle which
periodically manager and with adequate resources no yes 1. Located in the benefits from a
3. Underlyings are sufficiently liquid
(possiblity to replicate it if necessary) EEA or banking liquidity
2. Located in an line secured by
yes
OECD country an establishment
yes
belonging to either:
the group of 1. Located in the
Does the derivative not result in the delivery Ten (2) or EEA or
Is it published in an appropriate manner? or the transfer of non-eligible assets? E.g. no Are the following eligibility criteria 3. At least
Are the following eligibility criteria 2. Located in an
1. Sound procedures to collect prices, bank loans, commodities fulfilled? investment
fulfilled? OECD country
calculate the index and publish it 1. Valuation: accurate, reliable, grade or belonging to
1. Valuation: reliable prices 4. It can be
no 2. Information provided on a wide and yes regular prices (market prices the group of
available on a periodic basis no demonstrated
timely basis or prices made available by Ten (2) or
derived from issuers or by an in-depth
3. Full calculation methodology and/or systems independent from 3. At least
competent investment research analysis on a
components/weights are available free issuers) investment
Are the risks adequately captured by the Risk 2. Information: regular and case-by-case
of charge no 2. Information: regular, accurate grade or
Management Process of the UCITS? accurate basis
and comprehensive 4. It can be
yes demonstrated
by an in-depth
analysis on a
Is the index subject to an independent case-by-case
no basis
valuation? yes yes no yes

yes yes no no yes

(1)

yes yes yes yes yes yes yes yes yes yes

Eligible Financial Derivative Instrument Eligible Transferable Security or Money Market Instrument

What do the smileys mean?

Eligible Not eligible Key Restriction Reminders Embedded derivatives

Eligible within the trash ratio of 10% (article 41(2)a) of the 2010 law) • Single commodity indices are not eligible for UCITS
• “Highly-correlated” means that at least 25% of the correlation observations are above 0,8 There is an embedded derivative in a transferable security or in a money market instrument if
• 5%/10%/40% limits are measurable at issuer level whereas the 20% combined limit is measurable at group level
What do the footnotes mean? • The global exposure of a UCITS to financial derivative instruments may not exceed 100% of its net assets yes
1. Converted into cash within 7 business days • The global exposure can be measured using the commitment approach or a VaR method depending on the risk profile of the UCITS
2. Group of Ten: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States • In case of Relative VaR, the VaR of a UCITS may not exceed twice the VaR of a reference portfolio
3. Presumption of liquidity and negotiability when a transferable security is admitted to an official stock exchange • In case of Absolute VaR, the VaR threshold fixed by the UCITS on the basis of its investment policy and risk profile may not exceed 1. Some or all the cash flows of the transferable security or money market instrument (host contract) can be
4. Closed-ended funds are considered as eligible transferable securities for UCITS provided that:
20% modified according to a variable no
• they comply with the eligibility criteria applicable to transferable securities 2. Its economic characteristics and risks are not closely related to the ones of the host contract
• they are subject to corporate governance mechanisms (right to vote in the essential decision making processes of the fund, right to control the investment policy) • Borrowings/overdrafts are permitted up to 10% also for investment purpose but only fo a short period of time and not on a recurring
3. It has a significant impact on the risk profile and the pricing of the transferable security
• the asset management activities are carried out by an entity subject to national regulation designed to protect investors basis
5. Eligible assets for UCITS (transferable securities, money market instruments, shares/units of UCITS/UCIs, bank deposits, derivatives)
6. Financial instruments which yes
• have a maturity at issuance up to and including 397 days
• have a residual maturity of up to and including 397 days Your contacts
• undergo regular yield adjustments in line with the money market conditions at least every 397 days Embedded derivative should be taken into consideration in the context of articles 42, 43 and 46 of the 2010 law
• have a risk profile which corresponds to that of instruments which have a maturity of up to and including 397 days or are subject to a yield adjustment
7. Stock indices or bonds indices not sufficiently diversifed are considered as baskets of equities/bonds (look-through principle does apply) Anne Laurent, Partner Stéphanie Jean, Senior Manager 1. Eligibility of the underlying
2. Global exposure
Regulatory Compliance Advisory Services Regulatory Compliance Advisory Services 3. Look-through principle for the purpose of articles 43 and 46 of the 2010 law (diversification rules)
+352 49 48 48 2131 +352 49 48 48 2283 4. Risk Management Process
anne.laurent@lu.pwc.com stephanie.jean@lu.pwc.com
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• For Product Developers and/or Investment Managers
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Your contacts:
Anne Laurent, Partner +352 49 48 48 2131 anne.laurent@lu.pwc.com
Regulatory Compliance Advisory Services
Nathalie Dogniez, Partner +352 49 48 48 2040 nathalie.dogniez@lu.pwc.com
Regulatory Compliance Advisory Services
Nicole Schadeck, Senior Manager +352 49 48 48 2164 nicole.schadeck@lu.pwc.com
Regulatory Compliance Advisory Services

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