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UCITS Anatomy™


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Not to be confused with AIFs:Compare and contrast alternative investment funds regulated under AIFMD, which are professionals-only funds (hedge funds etc). The regulations are in some ways converging, but there are still a lot of differences in the types of risks that an AIF can take compared to a UCITS. See also: Depositary comparison under AIFMD and UCITS

UCITS - or "undertakings for the collective investment in transferable securities" - are regulated European investment funds, generally aimed at retail investors.

UCITS funds must meet strict criteria as to how they are set up, managed and marketed, and as to the portfolio of asset a UCITS fund is allowed to invest in: There are concentration limits and other criteria which ensure diversity of risk; assets must be liquid, there should be very limited use of leverage and the fund must ensure it has diverse exposure to trading counterparties, banks and so on.

The most recent UCITS update is UCITS V, (2014/91/EU (EUR Lex)), which has specific implications for Custodians and depositaries, and was driven in part by the fallout from Madoff. But the bulk of UCITS IV, set out at 2009/65/EC (EUR Lex), is still in force.


UCITS IV is the common name for 2009/65/EC (EUR Lex) passed by the European Parliament and of the Council of 13 July 2009. It was subsequently amended by...


On 23 July 2014 the European Union adopted 2014/91/EU (EUR Lex) on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions.

This directive introduces new rules on UCITS depositaries, such as the entities eligible to assume this role, their tasks, delegation arrangements and the depositaries’ liability as well as general remuneration principles that apply to fund managers.

The depositary as a specific function under UCITS legislation (rather as it does under AIFMD). The depositary may delegate its functions to a third party custodian - as to which see sub-custodian.

Rehypothecation gets me down

Financial instruments held in custody for a UCITS V fund must be segregated, clearly identifiable in the custodian’s books and records as belonging to the UCITS and critically the depositary (or its delegate[1]) may not rehypothecate those assets for its own account.[2]

A UCITS canre-use” assets for its own account on certain conditions, such as that the re-use benefits the UCITS and is in the interests of unit-holders is covered by high quality, liquid collateral under a title transfer collateral arrangement, equal at least to the market value of the reused assets plus a premium. This prohibits PB-style re-hypothecation (which is of course allowed under AIFMD structures but allows UCITS to engage in securities lending.

See Also

  1. If it has delegated the custody function, like.
  2. ESMA opinion on the subject. See also UCITS V Art. 22(7). Good note on it also from Matheson here.