EFAMA
EFAMA strongly believes that the derogation from the 20 per cent issuer limit proposed by ESMA should be extended to all UCITS funds and not just to MMFs. There does not appear to be a market rationale for making a distinction in this respect between MMFs and other UCITS. EFAMA urges ESMA to consider extending the scope of the proposed exemption to all UCITS funds which receive government securities as collateral.
EFAMA also finds that the revisions of the collateral diversification rules proposed by ESMA will temporarily place UCITS managers in an uncomfortable situation. To avoid unnecessary costs and efforts, EFAMA would welcome a clarification by ESMA that market participants will not be expected to comply with the 20 per cent issuer limit until ESMA has decided on a possible amendment of Paragraph 43(e) of the Guidelines
ISLA
ISLA has submitted a response to ESMA’s consultation on proposals to amend the collateral diversification rules contained in its guidelines for ETFs and other UCITS. The current guidelines require that no more than 20 per cent of the NAV of a UCITS may be held in collateral from any one issuer.
ESMA considers allowing a derogation from this provision for government issued collateral in certain circumstances. The proposal is that this derogation should be limited to money market fund UCITS only to allow them to use higher volumes of reverse repo against a single government issuer. ISLA argues that whilst it supports the proposal, the derogation should be available to all UCITS (not just MMFs). “We strongly believe that there should be a consistent approach to the diversification Guidelines for all UCITS and urge ESMA to avoid creating a two tier approach which would result from the implementation of option 1 of the proposal. We believe that this approach will have unintended consequences and will result in inconsistencies in collateral policies and procedures for funds within the same UCITS ranges", the statement by ISLA reads.
Implementing a diversification requirement by number of issues received adds complexity without necessarily mitigating any risk. The appropriate level of diversification will depend on a number of factors which are already considered in the Guidelines, such as quality of issuer and liquidity.
ISLA also points out that amending diversification rules only for MMFs will make cash collateral re-investment more restrictive as these funds will be disqualified as investment options as they may no longer meet the diversification requirements for non-MMFs.
Full-ISLA-response
Original consultation
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