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UCITS - Undertakings for Collective Investments in Transferable Securities

UCTIS - – Undertakings for Collective Investments in Transferable Securities was created in the 1980s as part of the European Union’s commitment towards establishing a ‘single market’ for financial services and trade across Europe.

When UCTIS was set up in 1985, the European Union had three objectives:

  1. To keep regulation up to speed with changes in the investment market.
  2. To create a level playing field for funds established in different member states.
  3. To ensure investors were well-protected by a single regulator across all EU markets.

Due to rules variation among the EU members, UCITS II was proposed in early 1990s to address those issues. However, the project was abandoned after the council of member states could not reach agreement over how far the proposals should go and what forms they should take.

Undaunted, the EU published the proposal for UCITS III in 1998. The new resolutions were drafted in two parts, and after three years of consultation and compromise, the UCTIS III Directive was finally adopted in 2001. Firms were given until February 2007 to ensure that their funds were fully UCTIS III complaint.

A UCITS III compliant fund would exhibit the following features:

  1. Can be sold anywhere within the EU.
  2. Investors have access to a simplified prospectus.
  3. Must not expose the investor to a loss beyond the amount paid for it.
  4. Must be priced accurately, regularly and independently.
  5. Must make available regular, accurate and comprehensive information on the portfolio and securities within.
  6. Securities invested in must be relatively liquid and negotiable.
  7. Must be able to effectively measure the risk of the securities invested in.

Firms that adopt the UCITS III structure will find that their regulated funds will be classified as either ‘sophisticated’ or non-sophisticated’ funds, depending on the powers they choose to apply.

Non-sophisticated funds can continue to operate using the same portfolio structure as traditional long-only funds, consisting primary of the purchase and sale of physical assets, such as equities and bonds.

In contrast, sophisticated UCITS III funds will be able to meet clients’ needs in a much more focused and innovative way. They have access to a range of other collective investments, including:

  1. index funds
  2. exchange traded funds, all wrapped up in the same fund, if required.

Managers can also add new strategies to enhance their portfolios.

The table below summarizes the different between non-sophisticated and sophisticated funds.

UCITSIIIFunds

Essentially, UCITS III would offers more flexibility in an uncertain markets whereby it:

  1. provides managers with greater freedom and flexibility
  2. allows for innovative fund strategies that can generate returns in different market conditions
  3. enable managers to develop more creative strategies that offer a wider set of solutions to investors
  4. empowers managers to reflect their strong conviction by going long or short

It should be noted that UCITS does not allow physical shorting of securities, but allow synthetic (derivative) shorting for the purposes of efficient portfolio management or modest investment purposes.