Brussels, 28/04/2004 (Agence Europe) - On Tuesday the European Commission adopted two Recommendations to facilitate the common implementation of some crucial EU rules on collective investment funds (UCITS), such as unit trusts, common funds and SICAVs. These Recommendations will help Member States' regulators interpret in the same way the rules on how UCITS or "undertakings for collective investment in transferable securities" may invest in financial derivatives, such as options, futures or swaps, and on how fund managers should present the main elements of their funds to retail investors in a "simplified prospectus". UCITS are established in all Member States and their total assets amount to around four thousand billion euros.
Buying or selling derivatives entails incurring risks, which are characterised by the so-called "leverage effect". In other words the actual risk-exposure taken via derivatives is not directly commensurate with the initial cash price paid, which is usually limited. But potential future liabilities arising from derivatives can be very significant. Therefore, the first Recommendation adopted by the Commission contains clear rules and principles to underpin robust risk-management standards for derivatives. Those standards aim to protect investors by ensuring that UCITS will at any time be able to meet liabilities incurred through dealing in derivatives. They must be calibrated to the real risk-profile of an individual UCITS' investments in derivatives.
The second Commission Recommendation concentrates on some critical components of the simplified prospectus that UCITS are required to make available to investors. That prospectus contains the basic information about the fund, such as the type of investment objectives and policy, the fund's risk profile, etc. The Recommendation introduces, in particular, standardised ratios to make sure that retail investors can compare information on funds' operating costs (through the "Total Expense Ratio" or TER) and get in every case a figure for a fund's volume of transactions (through the "portfolio turnover rate"). Furthermore, it is also expected that the industry's own standard-setters will further develop their own detailed guidebooks for fund-managers, based on the Commission Recommendation.
The Member States are expected to inform the Commission, as far as possible by the end of September 2004, of the implementing measures taken further to each of the Recommendations. The Commission expects to receive their feedback on the early impact of that implementation by the end of February 2005. Based on such feedback, the Commission may, if need be, adopt further measures to consolidate pan-European standards. Both Recommendations have been developed in close cooperation with Member State experts. They take into account, where relevant, existing standards and practice, but also call on Member States to do further harmonisation work to develop together detailed, calibrated standards, especially on derivatives. It is therefore expected that, in due time, the experts of the Committee of European Securities Regulators (CESR), in cooperation with the Commission, will do further preparatory work on convergence of standards, as they are already expected to do for standards applying to UCITS depositaries.