UCITS/UCIs/AIFs: Use of securities financing transactions

On 18 December 2020, and simultaneously with the publication of the results of its Thematic Review Portfolio Management by UCITS, the CSSF published an FAQ (“FAQ”) on the use of the following securities financing transactions (“SFTs”) by UCITS: securities lending transactions, reverse repurchase agreement transactions, repurchase agreement transactions, buy/sell-back and sell/buy-back transactions.

The objective of the FAQ is to bring further clarity concerning the use by UCITS of these SFTs, thereby taking into account the applicable regulatory framework as well as the supervisory experienced gained by the CSSF over the last years.

Although the focus of the FAQ is on the SFTs used by UCITS listed above, the CSSF also expects the following entities to consider the clarifications given in the FAQ:

• Luxembourg-authorised AIFMs;
• Luxembourg-registered AIFMs managing Luxembourg-domiciled regulated AIFs (Part II UCIs¹ and SIFs² );
• non-Luxembourg AIFMs managing Luxembourg domiciled AIFs;
• Luxembourg-domiciled regulated UCIs which do not qualify as AIFs (e.g. SIFs non-AIFs). 

The disclosure clarifications provided for in the FAQ mainly refer to the pre-contractual information to be given to investors in accordance with Article 14 of the Securities financing Transaction Regulation (EU) 2015/2365 (“SFTR”) and Section B of the Annex to SFTR (i.e. in the prospectus for UCITS and in the disclosure to investors for AIFs, Part II UCIs and SIFs).

The following points of the FAQ can be noted, without being exhaustive:

• Use of SFTs: the CSSF recalls that the disclosure must include:
  • confirmation of whether SFTs will be used on a continuous or temporary basis or if the use of SFTs will be dependent on market conditions (in that event, a clear description of the circumstances under which the reliance will used);
  • the expected and maximum proportion of the AUM that can be subject to SFTs: this proportion should not be defined as an unduly large range (e.g. 0%-100% is considered too large and a disclosure of the maximum amount of AUM of 100% for a given SFT is not accepted unless if it is specifically requested and justified, etc.).
• Risks incurred by the use of SFTs: the risk description must adequately cover the risks linked to each individual SFT and include information on the potential impacts of those risks.
• Disclosures related to costs/fees: the percentage of gross revenues generated by the use of SFTs must be disclosed, with a breakdown of the overall percentage of direct/indirect operational costs/fees by service provider (e.g. lending agent) with an indication of the category of service provided.
• Conflicts of interest: the potential material conflicts of interest arising from SFTs concluded with or involving related parties of the investment fund manager (“IFM”) concerned must be disclosed.
  
  The CSSF also specifies the requirements in order (i) to identify and record the circumstances which may give rise to a conflict of interest entailing a material risk of damage to the interests of investors and (ii) to mitigate and manage those conflicts of interest.
• Best execution: SFTs must be covered in the best execution policy of IFMs and robust control processes must be in place to ensure that the best possible result as regards securities lending revenues (lending fee) and as regards the costs/fees charged to the related entity.

The CSSF expects the disclosure clarifications provided in the FAQ to be reflected in the prospectuses of UCITS and in the disclosure to investors of AIFs, Part II UCIs and SIFs by 30 September 2021.