ESMA Consultation paper on Revision of the provisions on diversification of collateral in ESMA’s guidelines on ETFs and other UCITS issues

Please find below comments from the Swedish Investment Fund Association (SIFA)[1].

Q1: Do you believe that ESMA should revise the rules for the diversification of collateral received by UCITS that take the form of money market funds in the context of efficient portfolio management techniques and OTC transactions? If yes, do you agree with ESMA’s proposal?

SIFA believes that the rules for the diversification of collateral, Article 43(e) of the guidelines, should be revised. However SIFA is of the firm opinion that Option 2 (included in Annex II of the Consultation paper) should be chosen, that is not only money market funds but all UCITS should be included in the scope of the revised guidelines.

It is important that collateral received by a UCITS is of high credit quality and liquidity. When it comes to requirements on diversification, however, we do not see the rationale behind having more far-reaching requirements for collateral than what is the case for the UCITS’ portfolio itself. Should the collateral have to be used in case of counterparty default it must either be sold and portfolio assets be acquired or, even better, be directly eligible as portfolio assets (no transactions needed). It would not make sense if for example a fund investing only in the Swedish market should not be able to receive full collateral in the form of Swedish government bonds. Firstly; in case of counterparty default such collateral could often be included in the fund portfolio without even having to be sold and transformed into portfolio assets. This might not be the case with the current 20 % issuer limit since access to several issuers on a small market might be difficult to achieve. Secondly; with the current 20 % issuer limit there is a risk that less safe and liquid assets have to be chosen as collateral.

It would surely be in the best interest of the unit holders to receive collateral of as high credit quality as possible. Such assets could easily be transformed into portfolio assets in case of counterparty default. The same rationale goes for all types of UCITS, not only money market funds. Thus the UCITS Directive’s diversification rules (Article 54.1) should apply for collateral received by all types of UCITS. (It could also be noted that the money market fund definition is not commonly used in Sweden which means that a limitation to such funds would have little effect in Sweden.)

Q2: Do you think that ESMA should introduce additional safeguards for government bonds received as collateral (such as a specific issuer limit) in order to ensure a certain level of diversification? Please give reasons for your answer.

SIFA does not see the need for additional safeguards. The guidelines require collateral to be highly liquid and of high quality which should be sufficient (point 43(a) and (c) of the guidelines).

Q3: Do you agree with the proposed requirement to diversify the government securities across at least six different issues?

 The requirement is in line with the UCITS portfolio requirements (Article 54.1) and could therefore be considered. However SIFA believes that the important requirements when it comes to collateral are related to its credit quality and liquidity. For UCITS which find it most appropriate and safe to receive Swedish government bonds as collateral the requirement for bonds from at least six different issues could prove hard to fulfil due to a decreasing central government debt and therefore fewer issues of bonds. Such a requirement would make it difficult to choose the collateral considered to be the most safe.

Swedish Investment Fund Association

Helene Wall

General Counsel


[1] The Swedish Investment Fund Association with its 39 member companies represents the majority of fund-based savings in the Swedish investment fund market.


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