Olivier Sciales Investments Law Blog on Lawyers.com

A new regime applicable to securities lending operations performed by UCITS - and, in principle, by other UCIs subject to the 2002 Law – was introduced by CSSF Circular 08/356 released on 4 June 2008. The main point of this new regime is, by reforming the previous one (referred to in the Commission Directive 2007/16/EC, and the corresponding CESR guidelines) set out in 1991 (by CSSF Circular 91/75) to take into account the fast growing number of securities lending transactions Luxembourg UCITS and UCIs have recently been engaged in.

This Circular lays down the techniques and instruments which may be used by UCITS, comprising in particular securities lending transactions. The criteria to be fulfilled by the techniques and instruments subject to the Circular are threefold, namely that:

• They are economically appropriate (= realised in a cost-effective way);
• They are entered into for one or more of the following specific aims
  • reduction of risk
  • reduction of cost
  • generation of additional capital or income for the UCITS with a level of risk which is consistent with its risk profile and the risk diversification rules applicable to it; and
• The risks they entail are adequately captured by the risk management process of the UCITS.

The Circular provides broad guidelines on, inter alia, how the fund may lend its securities, which assets are eligible as collateral, and on the content of the prospectus of the fund addressed to investors, which overall reveals a more flexible administrative attitude adopted by the CSSF.

Crucial points to be noted may be summarized as follows:

• A Fund may lend its securities
  • Directly;
  • Via a standardized lending system organized by a recognized securities lending institution; or
  • Via a lending system organized by a financial institution subject to prudential supervision rules considered by the CSSF as equivalent to those laid down by Community law and specialized in that type of transactions.
• The assets eligible as collateral include:
  • Liquid assets (cash and short-term banking deposits, money market instruments, and letters of credit or guarantees on first demand issued by a first class credit institution non affiliated to the counterparty);
  • Bonds issued or guaranteed by an OECD Member State or a first class issuer offering adequate liquidity; and
  • Shares or units issued by daily valued money market UCIs (assigned a rating of
    AAA or its equivalent) or a UCITS investing in bond / shares referred to in the Circular.
• The prospectus of the fund must indicate:
  • That the Fund intends to enter in securities lending operations;
  • The purpose of such securities lending transactions;
  • The conditions and limits of such securities lending transactions;
  • The conditions and limits of collateral cash re-investment if the Fund intends to do so; and
  • As the case may be, a description of the risks inherent to such securities lending operations.

Chevalier & Sciales is a Luxembourg law firm mainly focused on Investment Funds (UCITS and SIFs), Securitizations, Corporate Law and Private Equity. For more information please visit our website at www.cs-avocats.lu or contact Olivier Sciales at oliviersciales@cs-avocats.lu