Central Bank Relaxes Index Confirmation Rules

The Central Bank of Ireland (the "CBI") has relaxed its requirements regarding index confirmations in the context of both pre and post authorisation processes in circumstances where a UCITS proposes to use, or is using, a financial index. 

Accordingly, as part of the fund approval process, a UCITS will only be required to confirm that a financial index meets the CBI's regulatory requirements where the relevant index is referenced specifically within the fund’s Prospectus (and certification of the index is not required). Moreover, a post-authorisation confirmation will only be necessary where an index referenced directly within the fund’s Prospectus is changed. 

Overview

By way of background, in July 2019, the CBI published revised guidance on UCITS Financial Indices (the “Guidance”) outlining the circumstances in which a responsible person that proposes to use a financial index for tracking or replication, investment or efficient portfolio management purposes ("EPM") must provide an index confirmation or certification to the CBI, depending on the nature of the index in question.

According to that Guidance, a UCITS that proposes to use a financial index should assess the index and, at the point of authorisation of the UCITS or approval of a new sub-fund, confirm to the CBI that the index meets the regulatory requirements or provide a certification with respect to that index.

An index confirmation can be provided in place of an index certification, if, on a “look-through” basis, it would be possible for the UCITS to directly invest in the constituents of the index as allowed by the UCITS Regulations by virtue of the constituents of the index being, themselves, UCITS-eligible assets and because the weighting within the index would meet the “5/10/40” diversification rule.  

The Guidance gave rise to the possibility that a separate index confirmation would be required, in advance of each time a UCITS proposed to gain exposure to a financial index even if that financial index was not referred to in the Prospectus (for example, if the UCITS wished to invest in an index future for EPM purposes).  As the Guidance gave rise to some confusion within the funds industry, Irish Funds sought further clarification from the CBI, in response to which, the CBI has stated as follows:

At the fund authorisation stage, the CBI requires a confirmation where an index is required to be referenced specifically within the fund’s Prospectus (and certification of the index is not required). The Responsible Person must determine whether a confirmation or a certification is relevant to the index in question.

In addition, a post-authorisation confirmation will only be required where an index that required confirmation as part of the initial authorisation process (i.e. an index referenced directly in the fund’s Prospectus) is changed.

For the avoidance of doubt, where an index requires certification, the UCITS, at all times, may only gain exposure to that index after the relevant certification has been submitted to the CBI.

Comment

As is clear from the above, a UCITS is now only required to provide the relevant confirmation at the fund authorisation stage where an index is required to be referenced specifically within the fund’s Prospectus. Moreover, where the fund is exposed to another index in the future, the UCITS does not need to provide a separate subsequent index confirmation to the CBI, as long as it is not necessary to mention the new index in the Prospectus supplement by name.

The CBI’s relaxation of the rules applicable to financial indices only relates to the confirmation process.  Where an index requires certification (because the underlying components of the index are not UCITS-eligible assets or the weightings within the index might exceed the “5/10/40” diversification rule), the UCITS, at all times, may only gain exposure to the index after the relevant certification has been submitted to the CBI.