Common Principles For Share Classes In UCITS Issued By ESMA
In the absence of a common EU framework for share classes of UCITS funds*, ESMA has identified diverging national practices as to the types of share classes that are permitted, ranging from very simple share classes (e.g. with different levels of fees) to much more sophisticated share classes (e.g. which may potentially have different investment strategies).
In order to ensure a harmonised approach across EU Member States, ESMA has issued an Opinion which sets out four high-level principles which a UCITS must follow when setting up different share classes:
Common investment objective. Share classes of the same fund should have a common investment objective reflected in a common pool of assets. ESMA takes the view that hedging arrangements at share class level are not compatible with the requirement for a fund to have a common investment objective, with the exception of currency risk hedging. Non-contagion. UCITS management companies should implement appropriate procedures to minimise the risk of contagion between share classes. Derivative overlays used to hedge currency risk must be scaled and managed appropriately in accordance with a set of minimum requirements, including limitation of potential loss, counterparty risk limits, operational and accounting segregation and stress tests, in each case at share class level. Pre-determination. All features of a share class should be predetermined before it is set up in order to allow the potential investor in the fund to gain a full overview of the rights and/or features attributed to his/her investment. This requirement does not limit the discretion of the UCITS management company as to the type of derivative instrument used to hedge currency risk or its operational implementation. Transparency. Differences between share classes of the...
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