No reuse of assets by depositary - UCITS V Provision: Difference between revisions

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{{ucits5anat|22(7)|UCITS}}
{{ucits5anat|22(7)|UCITS}}
The famous rule which rules out PB style rehypothecation for UCITS 5 funds. Optimistic PB Salesfolk may try to argue that they can get home under the limited exception as long as you limit rehypo to 100% of indebtedness or less, but this is wishful thinking. The exception is designed to allow {{tag|UCITS}} funds to engage in fully collateralised [[Agent lender|agent lending]], whereby a custodian lends assets into the market on the UCITS’ behalf (as its agent) to earn a positive additional return for the fund, rather than to allow a a custodian to defray its own financing costs from margin lending. To wit:
The famous rule which rules out PB style rehypothecation for UCITS 5 funds. Optimistic PB Salesfolk may try to argue that they can get home under the limited exception as long as you limit rehypo to 100% of indebtedness or less, but this is wishful thinking. The exception is designed to allow {{tag|UCITS}} funds to engage in fully collateralised [[Agent lender|agent lending]], whereby a custodian lends assets into the market on the UCITS’ behalf (as its agent) to earn a positive additional return for the fund, rather than to allow a a custodian to defray its own financing costs from margin lending. To wit:
*Reuse is defined to include transfer, sale and loan
*“[[Reuse]]” is defined to include transfer, sale and loan
*Reuse is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” depository acting as [[agent]] — like, an [[agent lender]] —on behalf of the fund, rather than as principal. Agent lending is a very different kettle of fish, where the custodian has not financed the asset, but rather is offering to obtain some yield enhancement by lending it out into the market against collateral.
*“[[Reuse]]” is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” depository acting as [[agent]] — like, an [[agent lender]] —on behalf of the fund, rather than as principal. Agent lending is a very different kettle of fish, where the custodian has not financed the asset, but rather is offering to obtain some yield enhancement by lending it out into the market against collateral.
*Agent lending reuse is explicitly for the benefit of the principal, in that it earns a positive return by doing it. The best you could say of a PB [[Rehypothecation|rehypothecating]] your assets is that you are avoiding a steeper financing charge you would incur if you didn't allow rehypo.
*Agent lending “[[reuse]]” is explicitly for the benefit of the principal, in that it earns a positive return by doing it. The best you could say of a PB [[Rehypothecation|rehypothecating]] your assets is that you are avoiding a steeper financing charge you would incur if you didn't allow rehypo.
*Likewise, the theory of [[rehypothecation]] is that it isn't [[Collateral|collateralised]], and certainly not with high-quality collateral: to the contrary, the prime broker’s right to take assets is dependent on the fund’s indebtedness to the PB, so that there is nothing to collateralise. Arguing that by effectively eliminating indebtedness is kind of like being collateralised (as long as you limit yourself to 100% of indebtedness) is, as I say, a stretch.
*Likewise, the theory of [[rehypothecation]] is that it isn't [[Collateral|collateralised]], and certainly not with high-quality collateral: to the contrary, the prime broker’s right to take assets is dependent on the fund’s indebtedness to the PB, so that there is nothing to collateralise. Arguing that by effectively eliminating indebtedness is kind of like being collateralised (as long as you limit yourself to 100% of indebtedness) is, as I say, a stretch.

Revision as of 17:41, 27 February 2019

UCITS V Anatomy™


In a Nutshell™ Clause 22(7):

22(7). Neither the depositary nor any delegated custodian may reuse the UCITS’ assets for its own account. “Reuse” includes transferring, pledging, selling and lending the assets.
The UCITS’ assets can only be reused where:

(a) for the UCITS’ own account;
(b) on the instructions of the management company on the the UCITS’ behalf;
(c) the reuse is for the UCITS’ benefit and in the interest of the unit holders; and
(d) the transaction is covered by high-quality liquid collateral received by the UCITS under a title transfer arrangement having a market value at least equal to the market value of the reused assets plus a premium.

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UCITS V full text of Clause 22(7):

22(7). The assets held in custody by the depositary shall not be reused by the depositary, or by any third party to which the custody function has been delegated, for their own account. Reuse comprises any transaction of assets held in custody including, but not limited to, transferring, pledging, selling and lending.
The assets held in custody by the depositary are allowed to be reused only where:

(a) the reuse of the assets is executed for the account of the UCITS;
(b) the depositary is carrying out the instructions of the management company on behalf of the UCITS;
(c) the reuse is for the benefit of the UCITS and in the interest of the unit holders; and
(d) the transaction is covered by high-quality and liquid collateral received by the UCITS under a title transfer arrangement.

The market value of the collateral shall, at all times, amount to at least the market value of the reused assets plus a premium.
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The famous rule which rules out PB style rehypothecation for UCITS 5 funds. Optimistic PB Salesfolk may try to argue that they can get home under the limited exception as long as you limit rehypo to 100% of indebtedness or less, but this is wishful thinking. The exception is designed to allow UCITS funds to engage in fully collateralised agent lending, whereby a custodian lends assets into the market on the UCITS’ behalf (as its agent) to earn a positive additional return for the fund, rather than to allow a a custodian to defray its own financing costs from margin lending. To wit:

  • “Reuse” is defined to include transfer, sale and loan
  • “Reuse” is expressed to be “for the account of” the UCITS. This is consistent with the “reuser” depository acting as agent — like, an agent lender —on behalf of the fund, rather than as principal. Agent lending is a very different kettle of fish, where the custodian has not financed the asset, but rather is offering to obtain some yield enhancement by lending it out into the market against collateral.
  • Agent lending “reuse” is explicitly for the benefit of the principal, in that it earns a positive return by doing it. The best you could say of a PB rehypothecating your assets is that you are avoiding a steeper financing charge you would incur if you didn't allow rehypo.
  • Likewise, the theory of rehypothecation is that it isn't collateralised, and certainly not with high-quality collateral: to the contrary, the prime broker’s right to take assets is dependent on the fund’s indebtedness to the PB, so that there is nothing to collateralise. Arguing that by effectively eliminating indebtedness is kind of like being collateralised (as long as you limit yourself to 100% of indebtedness) is, as I say, a stretch.
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