UCITS Share Classes

Further to the publication of two consultation papers on the use of share classes by UCITS (in December 2014 and April 2016), ESMA released its final Opinion on UCITS share classes on 30 January 2017 ("Opinion").

In this Opinion, ESMA focuses on the possibility for UCITS to use derivative overlays at share class level, while subjecting this practice to compliance with four principles: (i) common investment objective, (ii) non-contagion, (iii) pre-determination and (iv) transparency.

As regards the first principle, ESMA is of the opinion that hedging arrangements at share class level are not compatible with the requirement for a fund to have a common investment objective. The only exception is for currency-risk hedging arrangements. As a consequence, other derivative strategies such as duration hedging or beta hedging are not permitted at share class level for UCITS. Other main rules stemming from these four principles and affecting, in particular currency hedged share classes, are the following:

the costs, profits and losses should be operationally and from an accounting perspective only attributable to the relevant share class; counterparty risks should be calculated at share class level; only systematic hedging is compliant with the pre-determination principle. Over-hedging and under-hedging should be limited to 105% of the net asset value of the relevant share class and to 95% of the portion of the net asset value of the share class which is to be hedged...