Investment fund’s units no longer allowed as UCITS eligible investment under the „Trash ratio“

According to the ESMA Opinion 2012/721 dated 20 November 2012 (the “Opinion”), UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive (as transposed via Article 41(1)e) of the Luxembourg Act of 17 December 2010 on UCIs). 

This means that, according to the Opinion, units or shares of collective investment undertakings which do not fulfil all of the conditions listed in the foregoing Article 50(1)(e) do not consitute UCITS eligible investments under Article 50(2)(a) of the UCITS Directive (transposed via Article 41(2)a) of the Luxembourg Act of 17 December 2010 on UCIs) which provides that UCITS shall not “invest more than 10 % of its assets [also referred to as the "trash ratio”] in transferable securities or money market instruments other than those referred to in [Article 50(1)]."

For many years and subject to certain conditions issued by the CSSF prudential practice, Luxembourg UCITS used this so-called trash ratio to place up to a maximum of 10% of their net assets in certain shares and units issued by investment funds which did not meet all of the conditions of Article 41(1)e) of the Luxembourg Act of 17 December 2010 on UCIs such as shares or units issued by SIF qualifying under the Luxembourg Act of 13 February 2007 concerning special investment funds or by supervised and regulated hedge or commodity funds. 

In view of the Opinion, these investments will no longer be allowed and any existing position in such investment will need to be realized. According to the Opinion, ESMA is expecting that any portfolio adjustments required to ensure compliance with the Opinion will be made taking into account the best interests of investors and at the latest by 31 December 2013. 

The issue of this type of opinion is part of ESMA's role in building a common supervisory culture and consistent approaches across Europe. It is addressed to the national competent authorities in the EU and it is not legally binding. However, in the case where a national authority would not comply with an opinion issued by ESMA on this basis (i.e. Article 29 (1) (a) of ESMA Regulation n°1095/2010), it cannot be excluded that other procedures be initiated such as, but not limited to, the issue of a recommendation. 

At the time of circulation of this Special Newsflash, the CSSF has not yet published its official position on the above, but in the past, the Luxembourg CSSF has always followed ESMA's opinions or guidelines on this type of issue.