Brussels: Counterparty limits on Ucits funds to be amended in light of mandatory OTC clearing

LegalOperational RiskRegulation
06 Sep, 2012

The European Commission has hinted it will revise counterparty limits for Ucits managers trading OTC derivatives in light of mandatory clearing of swaps.

Existing legislation states that Ucits funds cannot have more than 5% of their assets exposed to a counterparty to an OTC derivative transaction, or 10% if that counterparty is a credit institution. However, mandatory clearing, as it stands, will force some swap traders, including Ucits managers to be 100% exposed to a clearing member or CCP.

Speaking in Brussels, Tilman Leuder, head of the asset management unit at the European Commission, indicated that Ucits counterparty limits would only be applied to OTC derivatives which are transacted bilaterally. “The Commission’s staff is currently reviewing what kind of counterparty exposure rules are most appropriate for swaps that in future must be cleared centrally,” said Leuder.

EMIR was widely criticised for not being compatible with Ucits. The rules would have prevented Ucits managers from trading centrally cleared swaps, or would have required them theoretically to clear through as many as 20 clearing houses.  “It is pretty clear that a centrally cleared swap is not the OTC derivative transaction of the type the Ucits rules on counterparty exposure intended to capture,” said Leuder.

It is expected these eased counterparty limits will apply to Ucits managers clearing their trades through CCPs in the EU. However, there is still uncertainty whether these rules will apply to Ucits managers clearing their trades through a non-EU CCP, although it possible non-EU CCPs which meet EMIR standards will be included.

The recent July 2012 Ucits consultation asked for public comment about whether counterparty limits for Ucits funds trading CCP-eligible swaps should be rescinded. It is widely expected a decision on these rules will come well in advance of any proposals on Ucits VI given that central clearing is likely to be implemented no later than 2013 in both the EU and US.

CCPsEMIREUEuropean CommissionOTC derivativesUCITSUS