As investment managers hunt for new sources of alpha in an increasingly competitive landscape, those operating UCITS funds face a particular challenge: navigating the strict eligibility rules that govern what these vehicles can and cannot hold. Structured debt instruments issued by special purpose vehicles (SPVs) are one such area where the path to eligibility is anything but straightforward.
RegTech company Zeidler Group recently delved into UCITS eligibility.
The legal basis for UCITS investment eligibility sits within Article 50(1) of Directive 2009/65/EC — commonly referred to as the UCITS Directive — which restricts funds to investing only in a defined set of asset classes. Any instrument under consideration must fall within the categories set out in Article 50(1)-(2) to be deemed eligible. Directive 2007/16/EC, the Eligible Assets Directive, offers additional guidance, though in practice, instruments such as structured notes require a far more granular, case-by-case legal and regulatory assessment that also takes into account the fund’s liquidity profile, risk management processes, strategy and disclosure obligations.
Legal and regulatory advisory firm Zeidler Group has noted a growing trend among investment managers to sidestep this complexity entirely. Rather than undertaking the required eligibility analysis, many are opting to block their UCITS outright from investing in more complex asset classes — a decision that may be costing those funds a viable return-generating opportunity.
The firm recently put its expertise to work on a case involving a UCITS seeking to invest in notes issued by a Luxembourg SPV under a secured note issuance programme. Alongside the full legal and regulatory eligibility assessment, Zeidler delivered a risk-based review and outlined a series of initial and ongoing considerations, enabling its client to arrive at a comprehensive, well-informed decision on whether to proceed with the investment.
The matter serves as a timely reminder that UCITS eligibility assessments are rarely simple, it said. When structured instruments involve embedded derivative components or bespoke issuance structures, the analysis becomes considerably more involved. Each case must be assessed not only against the wider UCITS framework, but also against the fund’s own operational and strategic parameters.
Zeidler provides tailored UCITS eligibility assessments across a broad range of asset types, helping investment managers conduct the rigorous case-by-case analysis needed to unlock more complex investment opportunities within the bounds of the regulatory framework.
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