On 16 April 2020 the CSSF published an updated version of its frequently asked questions on COVID-19 (the “Updated FAQs”). The latest version adds four questions applicable to passive and active breaches of investment restrictions by UCITS.
A PASSIVE BREACH OF GENERAL INVESTMENT RESTRICTIONS AND GLOBAL EXPOSURE LIMIT
The first question clarifies that passive investment breaches (i.e. outside of the UCITS control) of the global exposure limits laid down in article 42(3) of the Law of 17 December 2010 relating to undertakings for collective investment (the "2010 Law") and, more generally, passive breaches of the investment restrictions applicable to undertakings for collective investment do not need to be notified to the CSSF.
VaR LIMIT BREACH TO BE CONSIDERED A PASSIVE BREACH
The second question provides that breach of the VaR limit (either the maximum limit laid down in CSSF Circular 11/512 (20% for absolute VaR or 200% for relative VaR) or any other more restrictive internal limit set in the prospects of UCITS) resulting from volatility in financial markets can be considered as a passive breach of the investment restrictions.
OBLIGATIONS IN CASE OF BREACH OF VaR LIMIT
The third question explains that in case of a passive breach of the regulatory VaR limit (as set out in the CSSF Circular 11/512) or the internal VaR limit laid down in the prospectus, the CSSF expects the investment fund manager to take all appropriate steps to meet the limit within a reasonable time period. The manager should closely monitor the situation of the UCITS as well as the defined remediation plan and take any decisions with due regard to prevailing market conditions and in the best interests of investors. The occurrence of a passive breach does not preclude UCITS from continuing its day-to-day operations and management such as, for example, realizing investments following the subscriptions of new investors. However, any additional risk exposure taken by the UCITS increasing the overall level of risk of the portfolio should be viewed as an active investment breach.
NOTIFICATION IN CASE OF ACTIVE BREACH OF VaR LIMIT
In case of an active breach of VaR Limit (irrespective of whether it is the limit set out in the CSSF Circular 11/512, or the internal limit laid down in the prospectus) the CSSF should be notified by email to a dedicated address: opc.prud.sp [at] cssf.lu. The notification should include the following information:
- the legal name of the notifying person/entity and the corresponding CSSF identifier of the entity;
- the legal name of the fund and the sub-fund, and the corresponding CSSF code of the fund and the sub-fund;
- the VaR computation method (absolute VaR or relative VaR);
- the internal VaR limit (if prospectus allows limit below the regulatory limit);
- the VaR limit consumption;
- the date when the active breach occurred and the date when the breach ended;
- the reason(s) of the breach (i.e. new position, redemptions which are not managed by the fund manager, etc);
Should it be considered necessary, the CSSF may request additional information be provided.
For the purpose of the notification of the active breach of VaR limit using a standard template for active breaches under CSSF Circular 02/77 is not required.