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Page last published: 14 July 2010

Citigroup® Global Transaction Services
Fiduciary Services
news&views; December 2005
Hedge Fund Opportunities: Luxembourg Vs Germany, EC Green Paper on the Enhancement of the EU Framework for Investment Funds, Developments and Current Trends in Box Management, Carbon Funds: Which Instruments, which Strategies?, EU Savings Directive from an Irish Authorised Fund Perspective

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Across Europe

· Hedge Fund Opportunities: Luxembourg Vs Germany

· EC Green Paper on the Enhancement of the EU Framework for Investment Funds

· CESR's consultation on the simplification of the notification procedure

· Mediation mechanism between CESR members - another step towards a single EU Regulator?

· Developments and Current Trends in Box Management

· Market Timing and Fair Value Pricing by Catherine Downhill, FT Interactive Data

· Approaching your COLL conversion - the need For Unitholder Approval

· Bundled Brokerage and Soft Commission: FSA details proposed rules

· Summary of Consultation Paper 05/13 - 'Bundled brokerage and soft commission arrangements for retail investment funds'

· The changing face of ARROW and how you can prepare for an ARROW assessment

Luxembourg

· Carbon Funds: Which Instruments, which Strategies?

· CESR's second consultation on eligible assets for UCITS

· A New Opportunity: Pan-European Pension Fund Pooling

· Abbey National Case: how to interpret and apply the VAT exemption for investment funds?

Ireland

· EU Savings Directive from an Irish Authorised Fund perspective

Contacts

Welcome to the December 2005 "new-look" European News & Views! In the last few months many of our readers have expressed their interest in receiving all our European newsletters, since many of the updates on initiatives from European or supranational organisations such as the EU Commission, CESR or IOSCO were of general interest.

We have been working hard during the last months to establish this new European News & Views which we believe will provide more interest than separate UK, Ireland and Luxembourg editions. In line with Citigroup's fiduciary business expansion in Europe, we will provide you, from now on, with regulatory updates and comments on additional jurisdictions starting with Germany, where we have successfully established our platform for servicing both long funds and hedge funds including fund administration, depositary bank and master KAG services.

Once again, we have endeavoured to provide an interesting balance of articles. Earlier this year, we participated in the CESR consultation on eligible assets for UCITS. A second consultation has been organised which closed at the end of November. This second consultation focused on issues such as the definition of liquidity, the eligibility of closed-ended funds, the valuation of money market instruments and derivative instruments on financial indices and index-replicating UCITS. Having attended the open hearings organised by CESR in this respect on 9th May and more recently on 7th November, our article reviews the consultation paper and reflects on what the possible outcomes might be.

Keeping with the CESR theme, two other interesting consultation papers were issued recently: on 8th September on the establishment of a mediation mechanism for the resolution of disputes between EU regulators, and on 27th October on the simplification of the cross-border notification procedures for UCITS. In line with the approach of the European Commission not to proceed to a major overhaul of the UCITS legislation and to work on a more consistent application of the existing framework, CESR wishes to: a) avoid uncertainties in relation to procedures and documents necessary for a UCITS to market its units in another Member State, and b) in line with the requirements of the MiFiD Directive, establish a mechanism for resolving disputes between regulators.

Finally, the main European-driven event has been from our point of view the recent European Commission's Green Paper on the enhancement of the EU framework for investment funds. The open hearing organised in Brussels on 13th October, which we have attended, has further stimulated the debate. You will find in this newsletter Citigroup's fiduciary services response to this consultation process which closed on November 15th.

Talking about national issues, we have explored the implications of the Savings Directive in an Irish authorised fund context. As outlined by the Irish Revenue Commissioners in their Guidance Notes, all transfer agency departments must have procedures in place to ensure that a Tax Identification Number ('TIN') has been received, recorded and filed for all new investors. Furthermore, fund accounting units must have a process in place which details the relevant period to monitor the percentage holdings of the fund that is in interest-bearing securities.

For the UK, the issue of COLL (UCITS III) conversions is clearly the centre of attention. We have included an article on what some key issues will be for Managers in dealing with COLL, including extending investment powers and derivatives usage. In another linked-theme article, we review some emerging trends in the UK in Box Management, looking in particular at the opportunities provided by the COLL environment.

One of the other topics that has been the subject of much debate this year has been bundled brokerage and soft commission and how investment managers should deal with the issue for both institutional and retail clients.

In July 2005, the FSA issued its proposed rules for dealing with institutional clients. These new rules will become effective from 1st January 2006 (a transitional period has also been provided for). We summarise these rules here.

For Luxembourg, we review recent legislative and regulatory developments in terms of private pension vehicles and pooling techniques. Also, we propose a second article on carbon finance, following the one published last August, and an interesting comparison between the regulatory framework for hedge funds in Luxembourg and Germany.

In terms of external contributors, we are very grateful to Catherine Downhill of FT Interactive Data, who has contributed an article on Market Timing and Fair Value Pricing which outlines some approaches to a fair value pricing model. We also thank Lyndon Nelson from the Risk Department of the FSA, on the ARROW visit concept, what changes are occurring and how such changes affect you as managers and us as depositaries and trustees. We also thank PWC Luxembourg who have provided a newsflash on rulings by the European Court of Justice on VAT for admin and trustee/depositary fees and will update us in due course for the next European News & Views editions.

Finally, we would like to mention additional topics which will be analysed in the future editions.

· EFAMA has published very recently, in conjunction with PWC, its third report on tax discrimination against foreign funds, interestingly entitled "light at the end of the tunnel".

· IOSCO has recently issued two interesting papers: the first, providing guidance on anti money laundering practices for undertakings for collective investment; the second, identifying best practices standards on anti market timing and associated issues.

As always we welcome suggestions for further topics and areas of research that our readers may find of interest.

In conclusion, let me thank our colleagues who have hosted the local editions of News & Views in the last few months, and in particular Marc Pecquet, Managing Director and Citigroup County Corporate Officer in Luxembourg, and Bronwyn Wright, Head of European Fiduciary Relationship and Trustee Services for Citigroup in Dublin for their continuing support.

Sean Quinn
European Head of Fiduciary Services

news & views contributors

Financial Services Authority
Lyndon Nelson

FT Interactive Data
Catherine Downhill

Stefano Pierantozzi
Head of European Fiduciary Oversight
& Research
stefano.pierantozzi
@citigroup.com
tel: +44(0)207 508 6651

Cian O'Callaghan
Fiduciary Oversight & Research
cian.ocallaghan
@citigroup.com
tel: +44(0)207 500 8834

Adam Willis
Fiduciary Oversight & Research
adam.willis@citigroup.com
tel: +44(0)207 500 8303

Darren Burrows
Fiduciary Oversight & Research
darren.burrows
@citigroup.com
tel: +44(0)207 500 8847

Stephen Clark
Fiduciary Oversight & Research
stephen.clark
@citigroup.com
tel: +44 (0)207 500 6351

Ian Makin
Fiduciary Oversight & Research
ian.makin@citigroup.com
+44 (0)207 500 8955

Davide Tassi
European Fiduciary Officer -
Alternative Investments
davide.tassi
@citigroup.com
tel: +44(0)207 508 1133

Luxembourg

Laurent de La Mettrie and Michael LambionPWC Luxembourg

Patrick WateletHead of Fund Compliance & Fiduciary Oversight
patrick.watelet
@citigroup.com
tel: +352 451 414 231

Ulrich WittFund Compliance & Fiduciary Oversight
ulrich.witt@citigroup.com
tel: 352 451 414 520

Philippe SchneiderFund Compliance & Fiduciary Oversight
philippe.schneider
@citigroup.com
tel: 352 451 414 299

Ireland

Andrew Farrell
Head of Fiduciary Oversight & Research
andrew.farrell
@citigroup.com
tel: +353 1 622 6206

Luis Caso
Fiduciary Oversight & Research
luis.caso@citigroup.com
tel: +353 1 622 1052

Michelle Duffy
Fiduciary Oversight & Research
michelle.duffy
@citigroup.com
tel: +353 1 622 6159

Ingrid Byrne
Fiduciary Oversight & Research
ingrid.byrne
@citigroup.com
tel: +353 1 622 6264

Germany

Marco Sperlich
Fiduciary Oversight & Research
marco.sperlich
@citigroup.com
+49 69 1366 1179

Hedge Fund opportunities: Luxembourg Vs Germany

During the last two years we have seen increased interest by the European asset management industry in establishing hedge funds in Germany. This follows the promulgation of the Investment Modernisation Act. We want to review here the reasons for this success which, in our opinion, is due to a very favourable regulatory environment, comparing it with the hedge fund framework in the world's most important cross-border fund domiciliation centre - Luxembourg.

Citigroup has quickly established a reputation as one of the leading players in the German hedge fund market where it acts both as fund administrator and depositary. Performing depositary bank activities for onshore "long funds" in Germany for more than 10 years with our local banking vehicle, Citigroup Global Markets Deutschland AG & Co KGAA, Citigroup was best placed to take advantage of new market opportunities.

In the course of 2004, Citigroup established a one-shop platform for servicing hedge funds in Germany (locally called "funds with additional risks"), consisting of fund administration, depositary and asset management (KAG) services. Interested managers can also take advantage of Citigroup's prime brokerage services.

The growth of the German hedge fund market has been remarkable (market size should be almost 2 billion Euros by the end of 2005), considering that the Investment Modernisation Act is less than two years old.

To put things in perspective, the size of the Luxembourg market at June 2005 is 87 billion Euros, but legislation has been in place for approximately 15 years. Global hedge funds assets are estimated at 900 billion Euros.

Historical background

In Germany, onshore hedge funds could not be established before the coming into force of the Investment Modernisation Act on 1 January 2004. In Luxembourg, the Law of 30th March 1988 relating to Undertakings for Collective Investment ("UCI") provide, under part II of the law, for the establishment of alternative types of fund, delegating to the Commission de Surveillance du Secteur Financier ("CSSF") the task of defining acceptable investment strategies, substantially on a case-by case basis.

In the course of 2004, Citigroup established a one-shop platform for servicing hedge funds

Therefore the CSSF (still under the name of Institut Monétaire Luxembourgeois, IML) defined, with its Circular 1991/75 the investment restrictions applicable to funds with alternative investment strategies. Such restrictions were defined under Chapter I of the Circular which relates to UCIs whose principal object is to invest in future contracts (commodity futures and/or financial futures) and/or in options.

Following the implementation of UCITS III Directive, the CSSF felt that there was the need to establish a more adequate framework for hedge funds, and therefore Circular 2002/80 on "specific rules applicable to Luxembourg UCIs pursuing alternative investment strategies" was issued. The new Circular did not replace the provisions of Circular 1991/75 Chapter I, rather introducing a new "family" of alternative investment funds.

We feel it is more appropriate for the purpose of this article to focus only on this new category of funds which was introduced for the purpose of providing for a more modern and sophisticated vehicle for alternative investments.

Structural characteristics

There are no material structural differences between a hedge fund established under Luxembourg law and one established under German law. Since, in both cases, we are dealing with regulated type of funds, the presence of an authorised management company and of a depositary is required for the purpose of obtaining regulatory approval.

Interestingly, in terms of target investors, in Germany single hedge funds cannot be distributed to the public, while in the case of funds of hedge funds this is possible under some circumstances and subject to adequate caveats to be published in the fund's prospectus.

In Luxembourg, so-called part II UCIs can in principle be distributed to the public. Nevertheless, the CSSF would typically require the fund to be established under Law 19 July 1991, and so investment made only available to professional investors.

Short selling

One of the most important characteristics of a hedge fund resides in the extreme flexibility which is granted (or should be granted) to the portfolio manager in terms of investment and borrowing limits. In this and the following paragraph we will look into how these concepts are applied under Luxembourg and German regulations.

In terms of short selling, the CSSF in Luxembourg is rather prescriptive, identifying the following basic rules:

· A UCI cannot in principle have a short position on non-listed transferable securities. This is allowed as an exception if the non-listed securities are sufficiently liquid, and only under certain conditions.

· The commitments arising from short sales at a given time correspond to the cumulative non-realised losses resulting, at that time, from the short sales made.

· The aggregate commitments of the UCI resulting from short sales may not at any time exceed 50% of the assets of the UCI (short sales for which the UCI holds adequate coverage are not considered for the purpose of calculating the aggregate commitments).

· In connection with short selling, UCIs are authorised to enter into securities lending transactions as borrowers only with first class professionals and subject to some counterparty risk limits.

In terms of short selling, the CSSF in Luxembourg is rather prescriptive

In addition, in accordance with §112, as the fund has still to comply with the principle of risk diversification, investment into non-listed securities is limited to 30 per cent of the fund's assets. Nevertheless, no particular restrictions apply to short selling of non-listed securities.

Borrowings

Similarly to what we have just seen in terms of short selling, rules in Germany are rather basic.

Under German laws, so-called "funds of funds with additional risk" are regulated under §113 of the Investment Act

§112 of the Investment Act states that funds with additional risks (this is what hedge funds are called under German law) are characterised by "generally unrestricted borrowing".

In Luxembourg, a hedge fund can borrow up to 200% of its net assets, even if UCIs pursuing strategies entailing a high degree of correlation between long and short positions are authorised to borrow up to 400% of their assets.

Additional limits apply in Luxembourg, in terms of counterparty risk.

Investments into other funds

In Luxembourg, UCIs pursuant to CSSF Circular 2002/80 may not, in principle, invest more than 20% of their net assets in securities issued by a same target UCI (for multiple compartment UCIs, such limit applies to each compartment as long as liabilities are segregated between compartments).

A UCI can hold more than 50% of the units of a target fund as long as these units represent less than 50% of the assets of the investing UCI.

The restrictions above are not applicable to the acquisition of open-ended UCIs established under Part II of the Luxembourg law on collective investment (Law of 30 March 1988), or open-ended UCIs established in another country, but subject to permanent supervision by a regulatory authority.

Under German laws, so-called "funds of funds with additional risk" are regulated under §113 of the Investment Act.

Funds of funds with additional risk can invest in target funds that are either German-regulated hedge funds or foreign hedge funds subject to requirements comparable to those applicable to German hedge funds (funds established in non-cooperative countries or territories are not eligible investments).

No more than 20% of the assets may be invested in one target fund, and investment in more than two target funds of the same issuer or fund manager is not allowed.

Investment in target funds of funds is also not allowed.

Additional investment restrictions

The CSSF provides for additional restrictions that are not required under German law.

Luxembourg UCIs cannot, in principle:

· Invest more than 10% of their assets in non-listed transferable securities;

· Hold more than 10% of the securities of the same nature issued by the same issuer;

· Invest more than 20% of their assets in securities issued by the same issuer.

The above limits do not apply to investment into target UCIs.

The only similar restriction, according to the German Investment Act, is that a hedge fund cannot invest more than 30% of its assets in companies (equity investment) that are not listed on a stock exchange or regulated market. Similarly to what happens in Luxembourg, this limit does not apply to investments into target funds.

As far as German funds of hedge funds are concerned instead, it is worth mentioning that these cannot hold more than 49% of their assets in cash or money market instruments.

Use of derivatives and other techniques

The German approach as far as the use of derivatives is concerned, is relatively simple. In the case of single hedge funds, the use of derivatives is a legal requisite for the establishment of a fund with additional risks.

Funds of hedge funds cannot engage in short selling, and cannot leverage. Hence, the fund may enter into derivatives transactions only for currency risk hedging purposes. In Luxembourg, hedge funds (single and funds of funds) willing to enter into derivative transactions must meet the following basic criteria:

· The maximum leverage level of the fund must be disclosed in the Prospectus;

· The sum of commitments resulting from short selling of transferable securities, of commitments resulting from OTC derivative transactions, and of commitments resulting from ETD derivative transactions may not, at any time, exceed the value of the UCI's assets.

In addition, the CSSF requires nine more rules to be complied with when entering into derivative transactions.

1 Margin deposits for ETD transactions and the commitments for OTC derivatives cannot exceed 50% of the UCI's assets. Margin deposits must be matched by an equivalent amount in liquid assets.

2 The UCI may not borrow to finance margin deposits.

3 Investment in commodities or contracts relating to commodities (with the exception of commodity future contracts) is not allowed. Precious metals are eligible assets if they are negotiable on an organised market.

4 Premiums paid for the purchase of options are included in the 50% limit under 1 above.

5 The UCI must ensure adequate risk spreading through diversification.

6 The UCI may not hold an open position in a single derivative contract for which the margin required, or the commitment taken, represents more than 5% of the UCI's assets.

7 In line with the above point, premiums paid to acquire options with identical characteristics cannot exceed 5% of the UCI's assets.

8 A UCI is not allowed to have an open position in derivative contracts relating to a single commodity or to a single category of forward contracts on financial instruments for which the commitment together with the required margin amounts to 20% or more of the UCI's assets.

9 For OTC derivative transactions, the non-realised loss at a given time must correspond to the commitment at that time.

Securities lending

The German Investment Act does not make reference to securities lending transactions with reference to funds with additional risk, and funds of funds with additional risk; and no particular limitation is applied to this kind of transactions.

In Luxembourg, Section E.2 of the CSSF Circular 2002/80 specifies that an alternative investment UCI may enter into securities lending transactions in accordance with the provisions of the IML (CSSF) Circular 1991/75 (Chapter H, Section 3.).

Circular 1991/75 provides for two formal limits to the use of securities lending transaction.

The first being that such transactions cannot represent more than 50% of the value of the UCI's assets, unless the UCI is entitled to withdraw from the transaction at any time, and to receive back all the securities lent.

The second limit being that securities lending transactions may not extend beyond a period of 30 days.

The Circular 2002/80 amends the second limit so that the 30 days period is not applicable if the UCI is allowed to terminate the transaction at any time, and obtain the restitution of the securities lent.

Repurchase transactions and sale with right of repurchase transactions

The CSSF also focuses its attention on sale with right of repurchase transactions (opérations a réméré) and on repurchase transactions (opérations de mise en pension).

A hedge fund may enter into the above transactions provided that:

· If the UCI is acting as a purchaser, it may not sell the securities which are subject of the contract before the counterparty has exercised its right to repurchase the securities or until the deadline for the repurchase has expired, unless it has other means of coverage. The same applies to repurchase transactions on the basis of a purchase and firm sale.

· If the UCI is acting as seller, it may not, during the lifetime of the contract, sell the ownership or pledge to a third party, or realise a second time, in any form, the securities sold. The UCI must also hold at maturity of the transaction sufficient assets to pay, if appropriate, the agreed repurchase price.

No specific rules apply in this respect in Germany.

Role of the prime broker

An analysis of the role and responsibility of the depositary and of the prime broker in the case of hedge funds and of funds of hedge funds deserves one or more articles on its own. For the purpose of our analysis, it is worth noting that the German Investment Act, §112 (3) specifically deals with the role of the prime broker, stating that the individual duties of the depositary bank, in the case of a hedge fund, may also be performed by another comparable institution, provided that it is contractually ensured that the depositary bank is liable for any fault of the institution directly appointed by it, as if it were its own.

In Luxembourg, CSSF Circular 2002/80 is silent on the role of the prime broker. Standard rules in terms of delegation of custody activities to sub-custodians will apply, mutatis mutandis.

Conclusions

It is always difficult to make an objective comparison between legal and regulatory environments, but the analysis conducted above, and market trends observed, allow us to draw some conclusions.

Germany is, from our point of view, an extremely attractive location for setting up a regulated single hedge fund in Europe. Even if establishing a robust hedge fund platform in Germany may require some investments, the flexibility allowed by the regulators, the strength of the local financial market and the internal market size are all factors which are contributing to the development of the skill sets necessary for running this kind of business. Additionally, after the introduction of the German Investment Modernisation Act, outsourcing of most of the administrative tasks is now possible (the single platform developed by Citigroup for hedge funds in Germany is a clear example of this). Still it should be mentioned that the complexity of the local tax system is often perceived as a serious barrier by foreign fund managers.

In terms of funds of hedge funds, instead, from our point of view Luxembourg seems to be better placed. The Grand-Duchy is currently the most important centre for cross-border funds domiciliation, and the rules applicable to funds of hedge funds seem more flexible than those applicable in Germany.

Regardless of investment managers' appetite or personal preferences, establishing and running a hedge fund or a fund of hedge funds requires professional business partners and market expertise. If you are interested in receiving additional information on the regulatory environment for alternative investments in Germany, Luxembourg or Ireland, please contact us or your local Citigroup relationship manager.

EC Green Paper on the Enhancement of the EU Framework for Investment Funds

On 12 July 2005, the Commission of the European Communities (the "Commission") published a Green Paper "on the enhancement of the EU framework for investment funds", along with a list of "frequently asked questions". The Green Paper aims to review the functioning of the legislative framework for investment funds provided for by the UCITS (undertaking for collective investment in transferable securities) Directive.

The Commission has invited any interested party to comment by 15 November 2005. Citigroup European Fiduciary Services' ("EFS") submitted comments are reported in this article.

The Commission, while recognising the remarkable achievements of the European fund industry within the UCITS framework (28,000 UCITS, for about ¤ 4 trillion), is convinced that there is space for improvements, but excludes any fundamental legislative overhaul. However, it identifies some short-term measures for the purpose of ensuring consistent implementation across Member States, and a more efficient application of the existing rules.

An open hearing, held in Brussels on 13 October 2005, which was attended by senior EFS representatives, has further stimulated the debate.

The European Commission's analysis

The European Commissioner for Internal Market and Services, Mr Charlie McCreevy, has identified on occasion in a recent speech three main priorities for the fund industry: a) the proliferation of investment strategies, and their impact both in terms of consumer protection and of the financial system's stability; b) fund distribution, and potential conflict of interests faced by distributors due to different commission arrangements; c) corporate governance and disclosure.

Also, during his speech at the Brussels open hearing, Mr. McCreevy made clear his position, stating "I will want to be convinced that there is a cast-iron case before launching far-reaching change to existing European law in this field. I will not kick-start the regulatory machine for marginal benefits".

The Green Paper seeks to find answers to the above priorities and, in the meantime, identify areas of action for products which are not part of the UCITS framework, such as pension vehicles (UCITS can play a fundamental role to reduce the effect of the future pensions' crisis), hedge funds (in terms of both product and private placement regulations), and passporting rules for managers, depositaries, fund administrators (for the purpose of creating centres of excellence and increasing economies of scale).

The Green Paper

The Green Paper is divided in two main sections. The first section, "making existing legislation deliver", mainly focuses on: short term-priorities, the management company passport, and distribution, sales and promotion of funds.

The second section, "beyond the existing legislative framework - long term challenges" focuses on: cost efficiency and economies of scale, investor protection, competition from substitute product, alternative investments, and modernisation of the UCITS' framework.

We have tried to maintain the above structure in the following sections.

Divergences have emerged between Member States in how some of these amending provisions should have been implemented, thereby resulting in difficulties for UCITS to passport effectively

Priority actions

The first UCITS Directive (85/611/EEC) has been amended in January 2002 in several aspects. On one side, the "Product Directive" extended the eligible assets for UCITS investment. On another side, the "Management Company Directive" reinforced capital and organisational requirements for management companies, allowed them to passport certain services, and introduced the simplified prospectus.

Divergences have emerged between Member States in how some of these amending provisions should have been implemented, thereby resulting in difficulties for UCITS to passport effectively.

In recent months, the CESR (committee of European securities supervisors) Investment Management Expert Group has made significant contributions in consolidating the UCITS framework. This exercise will continue in the next months, focusing on four main topics:

1 Eliminate the uncertainties surrounding the recognition of funds launched during the transition from UCITS I to UCITS III.

2 Simplify the notification procedure for passporting funds, streamlining procedures and avoiding the Home State authorisation being contested.

3 Promote the implementation of Commission's Recommendations.

4 Clarify the categories of eligible assets for UCITS' investment.

The following texts in italics are direct quotations from the Green Paper and from the Citigroup EFS' response submitted as part of the consultation process.

"Q1: Will the above initiatives bring sufficient legal certainty to the implementation of the Directive?"

"A1: Citigroup EFS welcomes the initiatives recently put in place, as they all contribute to a better understanding of the UCITS framework and to how it operates. We still feel, however, that there are significant areas of improvement that have not been fully addressed until now."

"Q2: Are there additional concerns relating to day-to-day implementation of the Directive which need to be tackled as a priority?"

"A2: Our primary concerns relate to the tax treatment of undertakings for collective investment, and of passporting rules for their key service providers (asset managers, depositaries, fund administrators, transfer agents).

"In relation to the latter, if pure passporting is not considered the best solution, then at least a common approach should be applied across all Member States."

Making better use of the current framework

In terms of improving the use of the current framework, two main areas of interest are identified.

As far as it concerns the management company passport, the possibility for a fund manager to operate investment funds in different Member States is seen by a good part of the industry a key factor for ensuring efficiency and economies of scale. Such possibility was invoked by the management company Directive for UCITS established under a corporate form.

An effective management passport could allow significant cost savings for the investors without compromising the level of investor protection

Nevertheless, some ambiguities and the incompleteness perceived in the Directive, as well as concerns over the effectiveness of the regulators' controls in those case where supervision was split in two (one regulator for the UCITS, another for the management company) have led to this possibility not materialising. Two questions are raised by the EC in this respect:

"Q3: Would an effective management company passport deliver significant additional economic advantages as opposed to delegation arrangements? Please indicate sources and likely scale of expected benefit."

"A3: EFS believes that effective passporting could avoid the duplication practiced because of certain jurisdictions' restrictive clauses (eg asset management company in one jurisdiction but a portfolio manager acting on the basis of an outsourcing agreement in the other). An effective management passport could allow significant cost savings for the investors without compromising the level of investor protection unless regulators remained unequally diligent."

"Q4: Would the splitting of responsibility for the supervision of the management company and the fund across jurisdictions give rise to additional operational risks or supervisory concerns? Please describe sources of problem and steps that would have to be taken to manage such risks effectively."

"A4: We do not think this would raise any additional issues of significance. Most Member States already allow managers or depositaries to perform these activities under the regime of freedom of establishment through the creation of branches. A branch will be mainly regulated by the Home State authority but still be subject to other host state provisions which often have no contradiction. In addition, for funds distributed on a cross-border basis, dual supervision is de facto exercised in most cases from the Home State and the Host State regulators.

However, we would suggest that such splitting of responsibility will remain a potential additional cost for investors until the financial industry falls under the responsibility of a single European regulator. In this respect, we welcome recent initiatives taken by CESR to establish a mediation mechanism between securities regulators."

Splitting of responsibility will remain a potential additional cost for investors until the financial industry falls under the responsibility of a single European regulator

As far as the distribution, sales and promotion of funds is concerned, it is the Commission's opinion that investors faced with more complex funds need better and more user-friendly disclosure of performances and charges.

At the same time, as banks also start opening their networks to the sale of third party products, increased competition and transparency should bring additional benefits to the investor, and reduce the risk of mis-selling. In this respect, the Directive 2004/39/EC on markets in financial instruments ("MiFID") will provide a useful toolbox to clarify duties of care, risk warnings or other obligations (including best execution) that investment firms have to apply to clients considering investing into UCITS.

Attention should also be paid to ensuring a form of best (or at least, fair) execution for the "provision of services" to undertakings for collective investment

The Commission sees this as a two-stage process. In the first stage, it will consider the boundary between marketing (for UCITS) and sales/advisory services. In the second stage, it will perform a gap analysis, whether Level 2 legislation implementing the conduct of business principles and other relevant provisions of MiFID represent an effective basis for governing intermediation activities in respect of investment funds.

"Q5: Will greater transparency, comparability and attention to investor needs in fund distribution materially enhance the functioning of European investment fund markets and the level of investor protection? Should this be a priority?"

"A5: We think it should be a priority, and we are not aware of any circumstance which would cause us to argue to the contrary. In any case, transparency comparability and attention to investors' needs deserves attention regardless of associated side effects if the market is to expand."

"Q6: Will clarification of 'conduct of business' rules applying to firms which retail funds to investors contribute significantly to this objective? Should other steps (enhanced disclosure) be considered?"

"A6: In our view conduct of business, particularly in terms of sales practice, must be properly regulated since a retail investor, no matter how well advised, may still not be capable of fully understanding the nature and characteristics of an investment. As the complexity of financial products increases, enhanced disclosure is necessary but will never be the key factor in ensuring investor protection."

"Q7: Are there particular fund-specific issues that are not covered by ongoing work on detailed implementation of MiFID conduct of business rules?"

"A7: We believe that the obligation to "execute orders on terms most favourable to the client" under MiFID is of extreme importance for the fund business. We would suggest that attention should also be paid to ensuring a form of best (or at least, fair) execution for the "provision of services" to undertakings for collective investment."

Towards a cost-efficient industry

It is generally acknowledged that the existence of too many funds prevents the European asset management industry from fully benefiting from economies of scale.

Four main routes have been identified for the purpose of achieving economies of scale: a) cross-border fund mergers, which are difficult to achieve for practical reasons, including differences in tax and corporate laws between Member States; b) fund pooling, which allows for economies of scale while retaining legally-separated funds but which finds again barriers in tax, legal and regulatory differences; c) allowing custodian and depositaries to passport into other jurisdictions; d) improving the distribution infrastructure, starting from the processing of subscriptions/redemptions (Transfer Agents).

"Q8: Is there a commercial or economic logic (net benefits) for cross-border fund mergers? Could those benefits be largely achieved by rationalisation within national borders?"

"A8: We believe commercial or economic benefits must be assessed on a case-by-case basis, as we doubt that a single answer applicable to all cases exists. Furthermore, we do not believe national rationalisation is a solution for the long term, as this has already been largely achieved. Additional rationalisation could be obtained only through a substantial concentration of players in the asset management industry at European level as opposed to national."

We believe that increased competition can improve the efficiency of the market and thus reduce costs

"Q9: Could the desired benefits be achieved through pooling?" "A9: In our view pooling is not an answer, but can be an expensive workaround that seeks to mitigate the negative effects of an EU market that has not achieved the desired levels of harmonisation yet."

"Q10: Is competition at the level of fund management and/or distribution sufficient to ensure that investors will benefit from greater efficiency?"

"A10: We believe that increased competition can improve the efficiency of the market and thus reduce costs. Consideration should be given as to how investors will benefit from economies so generated.

We do not believe self-regulation can be sustained if the supporting legal and regulatory environment is inconsistent across all Member States

"We also believe that the current corporate governance arrangements do not generally ensure competition in the areas of distribution and management, as shown by the data provided by the chairman of ALFI during the Open Hearing in Brussels. More attention should also be paid to ensuring the independence of funds' directors and to increasing the influence of shareholders/unitholders."

"Q11: Which are the advantages and disadvantages (supervisory or commercial risks) stemming from the possibility of choosing a depositary in another Member State? To what extent does delegation or other arrangements obviate the need for legislative action on these issues?"

"A11: If the regulatory environment is truly harmonised there are no disadvantages we can think of, except that provisions have to be made to allow the investor to address complaints in his/her native language to a regulator which has the authority for enforcing its decisions across all jurisdictions. In our opinion this is best achieved by establishing a single European regulatory authority."

"Q12: Do you think that on-going industry-driven standardisation will bear fruit within reasonable time-frames? Is there any need for public sector involvement?"

"A12: We do not believe self-regulation can be sustained if the supporting legal and regulatory environment is inconsistent across all Member States. The public sector must help drive the integration process."

Maintaining high levels of investor protection

The UCITS framework has provided so far for a satisfactory level of investor protection. As CESR is going to look into the prevention of conflicts of interest and investor protection safeguards for UCITS managers as revised in the management company Directive (articles 5f and 5h), the Commission feels that with its reliance on formal investment limits, UCITS may struggle to keep pace with the evolution of financial markets and distribution networks. In this respect, there is certainly a need to undertake a more systematic assessment of risks arising at each stage of the value chain.

"Q13: Does heavy reliance on formal investment limits represent a sustainable approach to delivering high levels of investor protection?"

"A13: It is unlikely that the current investment limit approach will be sustainable for the infinite future, as increasing complexity in the financial sector has already demonstrated that the UCITS framework struggles to keep pace with financial innovation. However, we believe that the current approach is one that remains understandable to the average investor, and that more sophisticated methodologies could have the undesired effect of decreasing transparency."

"Q14: Do you think that safeguards -at the level of the management company and depositary - are sufficiently robust to address emerging risks in UCITS management and administration? What other measures for maintaining a high level of investor protection would you consider appropriate?"

"A14: The existing standards are extremely different between Member States. While in some countries the depositary almost acts as an external auditor, in others it is almost purely a processing unit with limited oversight functions. Overall, we feel that the regulatory framework for depositaries should be rationalised in the investors' favour otherwise the differences between a fund's depositary with enhanced fiduciary responsibilities and a mere custodian of assets will affect their confidence in the industry.

Overall, we feel that the regulatory framework for depositaries should be rationalised in the investors' favour

We would also suggest that in order to assess whether or not existing safeguards are sufficient, we should first ensure that there is a common understanding of the roles and responsibilities of all parties. We do not believe that such common understanding exists at present as demonstrated by varying practices. In terms of risks, we identify increased delegation/outsourcing and insufficient independence of funds' and/or management companies' directors as the most outstanding issues to be resolved."

Competition from substitute products

As the debate on the European legislative framework for UCITS evolves, it is important to consider the wider asset management landscape, including unit-linked life insurance or other structured products, which de facto replicate some UCITS features, while being subject to different regulatory or tax treatments.

"Q15: Are there instances resulting in a distortion of investor's choice that call for particular attention from European and/or national policy-makers?"

"A15: In some cases, tax or regulatory barriers hamper product passporting. If there is no competition between domestic and passported products, there is a lack of investor choice. We also believe that distortions are often caused by the way products are distributed or sold to the public. As we have mentioned above, increased transparency on fees, costs, performances and characteristics of the issuer are key factors in ensuring investors' protection."

Europe's alternative investment market

The alternative investment industry (mainly, hedge funds and private equity funds) has shown a significant increase in the value of assets under management in recent years. While offering potentially higher returns and new diversification benefits, alternative investments are more complex and involve higher risks for the final investors.

As the European fund industry develops, different national regimes are being established, with the risk of regulatory fragmentation

Alternative investments funds are not harmonised at European level. As the European fund industry develops, different national regimes are being established, with the risk of regulatory fragmentation.

"Q16: To what extent do problems of regulatory fragmentation give rise to market access problems which might call for a common EU approach to a) private equity funds and b) hedge funds and funds of hedge funds?"

"A16: We are querying whether alternative investments such as hedge funds, private equity funds and immovable property funds carry such a high level of risk that they must be substantially more regulated.

Complex financial products are structured and sold to professional or institutional investors under different forms. Also, there are already various products carrying high levels of risk (eg warrants and futures) or lower levels of liquidity (direct investment into properties) available to the retail investors. In this respect, imposing any unnecessary regulations on alternative investment funds may prevent the establishment of a new market, rather than improving investors' protection overall.

We believe instead that there is space for introducing products which have hybrid characteristics between a UCITS and an alternative type of fund, and which can still be of interest and sold to retail investors subject to adequate caveats. As indicated in the executive summary, Part II funds established under Luxembourg law provide for a good template for such a hybrid."

"Q17: Are there particular risks (from an investor protection or market stability perspective) associated with the activities of either private equity or hedge funds which might warrant particular attention?"

"A17: We do not think so. If satisfactory corporate governance processes are in place, there is no reason to believe that those instruments could not actually improve the stability of the financial markets and subsequently improve investors' protection."

The question now arises as to whether UCITS is getting too old to develop further, or whether it is finally getting old enough to express all its potential

"Q18: To what extent could a common private placement regime help to overcome barriers to cross-border offer of alternative investments to qualified investors? Can this clarification of marketing and sales process be implemented independently of flanking measures at the level of fund manager etc?"

"A18: We believe a common regime for private placement could facilitate the sale of non-harmonised products across EU countries. We do also believe that a harmonised definition of professional or sophisticated investor should be introduced as a matter of priority to prevent unfair competition between Member States' regulatory regimes."

Modernising UCITS law?

Experience has shown how difficult it is not only to adapt UCITS provisions to market changes, but also to ensure these changes are consistently implemented by Member States. Some have suggested that the UCITS Directive should be redrawn along the lines of recent European legislation, ie functional and principle-based first-level legislation supplemented by scope for detailed implemented law and reinforced supervisory co-operation (Lamfalussy approach). This exercise involves careful preparation and accurate choice of the overarching principles to be retained in first-level legislation.

"Q19: Does the current product-based prescriptive UCITS law represent a viable long-term basis for a well-supervised and integrated European investment fund market? Under what conditions, or at what stage, should a move toward principle-driven, risk-based regulation be contemplated?"

"A19: We believe that principle-driven regulation is adequate only when it can rely on a consistent legal framework, and when regulatory responsibility falls upon a defined entity. This is currently not the case in the entire EU market as demonstrated, for instance, by the patchy and inconsistent application of the principle of freedom of establishment and of freedom of provision of services across member states."

Conclusions

On 20 December 2005, the UCITS Directive will be 20 years old. In these years, it has helped in establishing a very solid reputation for the European investment fund industry.

The question now arises as to whether UCITS is getting too old to develop further, or whether it is finally getting old enough to express all its potential. From our point of view, UCITS so far has established a very solid base. However, to allow it to express its potential in full, some changes are required in terms of national legislation, tax harmonisation, and consistent supervision.

Our main concern is that certain players in the asset management business seem to be willing to stretch the existing UCITS framework to provide for a solution for alternative investments such as hedge funds, property funds or private equity funds. Our point of view is that efforts should be made to establish a new category of products, available for retail investment but differentiated from

UCITS, rather than trying to create a hybrid vehicle and potentially put at risk the reputation of UCITS with the public of investors.

CESR's consultation on the simplification of the notification procedure

The Committee of European Securities Supervisors ("CESR") issued on 27 October 2005 a consultation paper on guidelines intended to simplify the cross-border notification procedures for UCITS (Undertakings for Collective Investments in Transferable Securities). This will shortly be followed by an open hearing at CESR's offices. Streamlining the notification process will allow better competition between national and passported UCITS and costs savings which should eventually be for the benefit of underlying investors.

The final guidelines issued as a result of the consultation process will be published in June 2006, according to the plan published by CESR. One of the key drivers in this process will be the clarification on the eligible assets for UCITS investment, a parallel workstream which started in March 2005 and which should deliver in January 2006.

Objectives and deliverables

CESR's hope is that these guidelines will facilitate the "consistency of practices regarding the notification procedure of UCITS". The main aims of the exercise can be summarised as follows:

· Avoiding uncertainty related to procedures and necessary documents for a UCITS which proposes to market its units in a Member State other than that in which it is situated

· Avoiding uncertainty related to procedures and necessary documents for a UCITS which wants to maintain its authorisation for marketing in a Member State other than that in which it is situated

The outcome of CESR's work will be reflected in common guidelines which will not constitute legislation, but which CESR members will apply to the day-to-day regulatory practices, on a voluntary basis.

A common set of procedures

CESR members agree as from now that the host state authorities' competences will be confined to the provisions of Articles 44(1) and 45 of the Directive -hence these will not extend to how the UCITS comply with the UCITS Directive, but will be limited to marketing arrangements.

Article 46 of the Directive deals with the notification procedure for a UCITS willing to market its units in a Member State other than that in which it is situated.

CESR is proposing the adoption of a standardised notification letter in the first instance, an example of which is proposed as an appendix to the consultation paper. The notification letter, along with all the accompanying documentation and information required according to the Directive, can be submitted to the Host State regulator in electronic format.

CESR is seeking also to clarify some aspects of the two-months' notification period, both in terms of starting date (which is the moment at which a complete notification is received by the host state regulator) and in terms of management of the notification period.

In this respect, the Directive establishes that a UCITS may start marketing its units in a host state two months after the notification to the relevant regulator, unless the regulator in question establishes in a reasoned decision that the marketing arrangements do not comply with Articles 44(1) and 45 of the Directive.

Since the Directive does not give additional details as far as the reasoned decision process is concerned, CESR proposes the adoption of a standard procedure to deal with those cases where the documentation received by the Host State regulator on the occasion of the notification is not adequate, but can be improved if the UCITS puts in place remedial actions, so as to avoid the issue of a reasoned decision. This could be achieved by establishing a procedure under which the Host State regulator would inform the applying UCITS, via a written duly-motivated communication, that unless additional or updated information is received, it will have to issue a reasoned decision.

Certification and translation requirements

Currently, many regulators require the certification of the documents related to the notification procedure for UCITS.

To simplify this practice, CESR suggests that the Host State regulator may require such a certification only for the simplified prospectus. This is justified by the fact that the simplified prospectus is the most informative document for the investor, and the key tool for enabling well-informed investment decisions. This requirement may be waived in those cases where the simplified prospectus of the notifying UCITS is published on a website under the responsibility of the UCITS' Home State regulator.

The amendment of national legal provisions may be necessary in some cases, hence the need for a transitional period for the implementation

Finally, CESR members agreed that there is no need to use the Hague-Apostille for certifying documents.

The harmonisation effort also focuses on the need for the notification and accompanying documents to be sent in original form and in the Host State language. As the documents will be distributed to investors, a correct translation is necessary to ensure information provided is accurate and not misleading. However, it is not the task of the Host State regulator to assess the accuracy of the translation compared with the original document.

Host State regulators can allow the use of a language other than the Host State official one at their discretion.

Rules for umbrella funds

Certain regulators currently require the notification of an umbrella fund as a whole (including all sub-funds), while others require that only those sub-funds that are actively marketed be notified. Also, in some cases, regulators regard the adding of further sub-funds as a modification of the notification of the umbrella.

To clarify these issues, CESR members have agreed the following approach:

1 All sub-funds can be included in the same notification, if these notices are provided simultaneously.

2 If a UCITS decides to market sub-funds which were already included in the notification material but which were not proposed to be marketed in the host state at that stage without changing the existing marketing arrangements, a simple communication concerning the adding of sub-funds is needed.

For this communication, the two-months' notice period does not apply.

3 If new sub-fund are added to the umbrella fund, and these are proposed to be marketed in the host state, the notification procedure and the two-months' period apply.

Conclusion

The consultation paper also deals in detail with the contents of the notification and proposes standard letters and forms to facilitate the process.

One of the consequences of CESR members' commitment to applying these procedures is that the amendment of national legal provisions may be necessary in some cases, hence the need for a transitional period for the implementation of these guidelines - and possibly delays in their implementation.

The consultation paper also recognises that there is a significant harmonisation gap as far as the definition of "marketing of UCITS" is concerned. Since this is not defined in the Directive, each Member State has applied different definitions and rules.

The consultation goes in the right direction in the sense that it attempts to clarify the approach to be used. Nevertheless, true "passporting" and true "notification" still seem far from being achieved.

Mediation mechanism between CESR members -another step towards a single EU Regulator?

The Committee of European Securities Regulators ("CESR") was encouraged by market participants as well as by its members to set up an international mediation system to resolve disputes between EU regulators. Following the establishment of a CESR "mediation task force" in January 2005, a paper for comments was published in September 2005 on the CESR's proposal for a mediation mechanism. All interested parties could submit their comments to CESR by 30 November 2005.

The need for the establishment of a form of mediation or dispute resolution mechanism arises as a consequence of Article 16 of the Market Abuse Directive which states that "a competent authority whose request for information is not acted upon within a reasonable time or whose request for information is rejected [by another's state competent authority] may bring that non-compliance to the attention of the Committee of European Securities Regulators, where discussion will take place in order to reach a rapid and effective solution".

The establishment of a mediation process will not ensure that disputes will be settled exclusively at CESR's level, however, as the outcome of the mediation will not be legally binding and will not prejudice infringement proceedings of the European Commission ("EC") or of the European Court of Justice ("ECJ").

The establishment of a mediation process will not ensure that disputes will be settled exclusively at CESR's level

Key features of the proposed mechanism

The mediation mechanism aims at improving convergence at supervisory level, rather than enforcing decisions.

As the mediation mechanism is designed as a "peer mechanism", only CESR members will be able to initiate the process, which means market participants will have to bring any matter to the attention of their national CESR member to have access to the mediation mechanism.

As the outcome of the mediation process will have no legally-binding value, and in many EU countries some administrative decisions are difficult to revoke or withdraw (very often only after due process under national laws), mediation would be better suited to disputes involving significant and persistent differences of opinions between CESR members on the criteria applied consistently to support certain decisions.

Under this approach, the mechanism will be better placed to deal with issues of a cross-border nature, so any domestic disputes would therefore fall outside its scope.

Which impact for the fund business?

As mentioned above, the implementation of the Market Abuse Directive is one of key drivers in the establishment of the mediation mechanism, and it can be expected that most of the issues to be raised for CESR's attention will relate to the exchange of information in case of investigations into market abuses.

CESR recognises that potential disputes are likely to include mutual recognition (eg notification under prospectus directive, UCITS directive or MiFID).

CESR has also identified some "negative criteria or restrictions" which could be applied to render disputes unsuitable for mediation. Mediation would be excluded, for instance:

· When legal proceedings have been initiated at EU level or at national level before a competent national authority

· When the issue underlying the dispute is being dealt with by, or has been referred to, CESR for work at Level 2 or Level 3

· When national legislation, which is not within the regulatory competence of the requested CESR member, does not allow the latter any leeway in accommodating the demands from the CESR member seeking mediation.

Under this approach, the mechanism will be better placed to deal with issues of cross-border nature, so any domestic disputes fall outside of its scope

There is, however, the risk that as most of the barriers which prevent the establishment of a pan-European asset management business come from the particular way each member state has converted EC Directives in national law, the majority of the regulatory barriers faced by the industry could not be dealt with at CESR's level, and that the mediation process will be limited to minor or not particularly high-profile issues. By way of an example, we consider it very unlikely that the existing barriers to passporting asset management services under UCITS III would ever be put under discussion by this mechanism.

Procedural framework

We do not wish to get into too much detail in describing the way the mechanism will function, as the consultation process could bring considerable changes before a definitive decision is taken.

CESR envisages a process under which any dispute raised will be screened against the mediation mechanism's scope and criteria by a so-called "gatekeeper".

The gatekeeper would not express any view on the issues, but would just consider the merit for escalation to the mediation (to be performed by a Panel of Mediators) on the basis of objective criteria. Should a gatekeeper come to the conclusion that a mediation request does not fulfil the conditions for mediation, the decision could be "appealed" to the CESR Chairman, for review by the CESR plenary.

From an organisational point of view, it is envisaged that reliance may be placed on a system of specialist gatekeepers (CESR suggests three different areas of specialisation) to enhance the speed and quality of the process. Appropriate arrangements would also be put in place to ensure continuity, succession plans, and appropriate alternates. Conflicts of interest would also be adequately managed.

Under CESR's proposals, gatekeepers could be responsible for appointing independent mediators or "panellists" for each dispute. Alternatively, a standing panel could be established for each relevant area.

To ensure that mediators/panellists have the adequate professional expertise, these would be senior experts from CESR members, and in adequate numbers to provide for a sufficiently wide range of opinions.

Gatekeepers will also be required to inform the Commission, on a no-name basis, of all cases going into mediation.

Mediated cases should be published by CESR, again on a no-name basis.

Conclusions

The establishment of a formal mediation mechanism can be analysed from two points of view.

From one perspective, it is a positive event as it creates a formal mechanism for the escalation and resolution of conflicts between regulatory authorities, without the need of escalating to the European Court of Justice.

The fact that the decisions taken by the mediation mechanism are not legally binding should not be considered a weakness in itself, as we consider it likely that CESR members will prefer to comply with the decisions taken rather as much as possible.

Nevertheless, for the same reasons, it is unlikely that material issues will be discussed at this level, and will accordingly be referred to the ECJ or other competent tribunals or authorities.

As stated above, the main drive for the establishment of the mediation mechanism is the requirement in the Market Abuse Directive for CESR's involvement in the case of a request for information of a Member State regulator not being answered by another Member State regulator. As such, most of the cases to be brought to CESR's attention will initially relate to these issues. Nevertheless, it is easy to anticipate that once the mechanism is up and running, issues relating to mutual recognition and cross-border provision of services will become more and more frequent.

The fact that industry players will not be able to access the system directly will not preclude them from having recourse to the mediation mechanism as, ultimately, issues of more relevance will surely be sponsored by Home State regulators - except maybe in those cases where the Home State regulator's interests are not in line with its own regulated business.

Developments and Current Trends in Box Management

In this article we consider certain emerging trends in the approach of UK Authorised Fund Managers with respect to box management, having particular regard to the opportunities provided by the new COLL regime.

Running a box with the principal aim of making a profit

There are two ways for a Manager to profit through the box. Firstly, in the case of dual-priced funds the Manager can profit through the investor unit dealing activity by taking the units of redeeming investors into his box at the cancellation price and then issuing them to investors in the fund at creation price.

The second method for a Manager to profit through the box, both in dual and single-priced funds is by actively taking positions in the box and thereby gaining exposures to the underlying assets of the funds.

It is widely accepted that in recent years there has been a move away from this second method of actively taking positions in the fund. However, it is by no means an extinct practice and a number of Managers do continue to take positions in certain of their funds.

As regards the first method, it is true to say that many Managers who converted to single pricing as part of OEIC conversions prior to COLL are now realising that they have lost a previously valuable revenue stream by now meeting unitholder deals at a single price rather than at creation and cancellation prices respectively. In some cases, the loss of revenue has been in excess of £1 million per year.

It is not surprising, therefore, that certain Managers are reportedly giving consideration to moving back to dual pricing if, as is expected, the FSA's forthcoming Consultation Paper and subsequent Policy Statement permit funds to continue dual pricing beyond 2007 and make this pricing methodology available to ICVCs (Investment Companies with Variable Capital) as well as to authorised unit trusts.

Managers, however, may also want to take account of the various developments on the corporate governance front, as discussed later in the paper.

Running a minimal box size policy

For the majority of Managers, the focus in recent years has not been so much on making a profit through box management but rather on reducing the amount of capital that they have tied up in their box. For example, a Manager who has 25 funds, each with 2 share-classes and each share class having a £10,000 buffer will have an average of half a million pounds of capital tied up in its box across its funds.

Below we consider how the new more flexible COLL regulations can assist a Manager to run a lower box holding by taking advantage of the ability to give the creation/cancellation instruction within three or four hours of the valuation point, rather than within two hours as is the case under the CIS Handbook.

The regulations

Under the CIS regulations, for unit trusts, the Manager was obliged to make a two-hour notification to the relevant Trustee in respect of the creation or cancellation of units. There was no equivalent provision for ICVCs, but market practice was such that the ACD must make an equivalent return to the Depositary in any case.

COLL provides Guidance in relation to this matter, which applies equally to Unit Trusts and ICVCs, that an authorised fund manager should agree a period of time with the Depositary/Trustee during which it will give instructions to issue or cancel units. Rather than prescribing a two-hour notification period, greater flexibility is provided for within COLL. The Guidance states that where the authorised fund manager operates a box with the principal aim of making a profit, this period will be short (for example, two hours); otherwise a longer period (for example, up to the next valuation point but in all cases within 24 hours) may be acceptable.

The rationale behind this Guidance is in recognition of the fact that, as the authorised fund manager normally controls the issue, cancellation, sale and redemption of an authorised fund's units, it occupies a position that could, without appropriate systems and controls, give rise to a conflict of interest between itself and its clients.

Reducing the box holding

Operating under CIS regulations, a Manager would have to make the notification of creations and cancellations to Trustees within two hours. This tight time frame means that the instruction is often given before the definitive price of the units is known. This fact creates a problem for Managers who have received in a deal in monetary terms (a "consideration deal"), as they don't know exactly how many units this will constitute and hence need to leave a buffer within their box. The example below considers this in respect of a deal for £100,000.

Example

£100,000 consideration deal, Manager ensures that sufficient buffer is in the box by taking +/- 10% of yesterday's price.

Yesterday's price	1.215
Today's Estimated price (within 10% either way of 1.215) between 1.094 and 1.336
	Deal	Units	Units
Opening Box			20,000
Today's net sales	25,000 units	25,000
	£100,000 at	91,407
	estimate of 1.094	----
		116,407	-116,407
			----
Closing box if no creations/cancellations			-96,407

Therefore, using this estimate of price, the Manager would have to create at least 96,407 units in order to be relatively confident of avoiding a negative box and indeed would probably also want a buffer in excess of this.

Of course, if the price actually increases by 10% from the previous day to 1.336, the £100,000 would only give rise to issuance of 74,822 units and the Manager would end up carrying an extra 16,585 units (£22,166) in his box holding.

Example

£100,000 consideration deal is done at a price of 1.336

Yesterday's price	1.215
Today's Estimated price (within 10% either way of 1.215) between 1.094 and 1.336
	Deal	Units	Units
Opening Box			20,000
Today's net sales	25,000 units	25,000
	£100,000 at	74,822
	estimate of 1.336	----
		99,822	-99,822
			----
Closing box if no creations/cancellations			-79,822

However, if the Manager expects the actual price of the units to be known, for example, within 3 hours of the valuation point, then, by delaying the instruction of creations/cancellations until then, the Manager will then be able to make a more precise calculation of the actual number of units to be issued for the £100,000 and hence a more precise calculation of the amount of units to be created/cancelled.

There may, therefore, be a real benefit to Managers operating under COLL in agreeing with their Trustee that the notification of creation/cancellation instructions is to be given within a period of say 3 to 4 hours, rather than within the 2 hours required under CIS Handbook. However, it is fair to say that there has not been a huge rush by Managers to extend the "two-hour" window to three or four hours or to even more relaxed hours than that.

Notwithstanding the above flexibility provided by COLL, the view of Managers to date has generally been that the two-hour window is a good discipline and that there this is no business case in itself for relaxation of those limits.

It is also worth noting that both the CIS regulations and the COLL regulations do allow for the notification of creations/cancellations to be made in a combination of both units and of a monetary amount. Primarily because of systems issues, such a combination approach has never been overly popular or possible and generally speaking, Managers continue to give the creation cancellation instructions in unit terms.

Netting boxes within shareclasses

Managers may also find some scope for reducing box holdings through the use of netting. Through this practice, there is scope for looking at the box at a sub-fund level rather than at individual shareclass level. Therefore, if one shareclass has minus 1000 units but the other shareclass within the fund has positive 2000 equivalent units, considered together there would not be a negative box position within the sub-fund.

However, there are limitations on the use that can be made of netting. Whilst there was provision for netting, subject to certain conditions, within the CIS handbook, this provision was not carried over into COLL. The FSA have indicated however that there was no intention to remove the ability to treat income and accumulation units as a single class for the purposes of calculating creations and cancellations and that it will therefore consider how to amend the wording of COLL to make this clear. It is perhaps likely that the FSA will retain the requirement set out in the CIS Handbook that the characteristics of the shareclasses need be the same in all material respects except that one is income and the other accumulation.

Avoiding Regulatory Breaches

One of the benefits of an effective box management policy is a reduction in the occurrences of regulatory breaches. It is worth noting the number of instances of material box management errors and of negative boxes occurring is reportable to the FSA by the Trustee/Depositary on a quarterly basis. The question for Managers will be whether the occurrence of negative boxes is best avoided by maintaining an appropriate buffer within the Manager's box or by waiting until the unit price is known before giving the instruction to create or cancel units.

Corporate Governance Arrangements

In reviewing their box management policy, Managers may also want to have regard to various recent developments in corporate governance arrangements for collective investment schemes. Extracts from the IMA's recent "Review of the Governance Arrangements of United Kingdom authorised Collective Investment Schemes" are set out below. However, it is worth noting that there have been some arguments made for even more robust governance arrangements, such as requiring Managers to disclose to investors the amount of any box profits made or even to require Managers to pay back to the fund any such box profits made.

Recommendation No. 12 - Improving Disclosures

FSA CIS regulations should be amended to require that the Manager includes within the CIS prospectus, a statement of its policy on box management, making it clear the purposes for which the box is used.

Recommendation No. 13 - Extending the role of the Depositary

The Depositary's oversight role should be extended to review the Manager's use of the box and confirmation that it has been managed in accordance with the policy set out in the prospectus. The prospectus disclosure should be amended if it is not accurate or current.

Extracts from IMA's "Review of the Governance Arrangements of United Kingdom authorised Collective Investment Schemes"

Market Timing and Fair Value Pricing

Events occurring after an exchange closes but prior to a fund's Net Asset Value (NAV) being calculated can affect the value of a fund's holdings traded on those exchanges. Post-closing government actions, open market fluctuations and natural disasters are some of the events that can cause the value of an equity to deviate from the local closing price. This situation opens the door to arbitrage, in which investors buy investment fund shares at a 'stale' NAV and then cash out, reaping a virtually risk-free profit. This form of market timing is often referred to as time zone arbitrage.

For the majority of long-term investors such arbitrage creates asset dilution, and it has been well documented that US-domiciled mutual funds holding non-US securities were vulnerable to arbitrage profits of up to 40 per cent annually from 1998 to 2001.

However, European-domiciled funds could also be at risk if they contain equities traded on exchanges that close prior to their order cut off and NAV time.

A report issued by the Association Luxembourgeoise des Fonds d'Investissement (ALFI) states: '... it is clear that weaknesses and inefficiencies also exist in certain European mutual fund valuation models that could give rise to arbitrage opportunities'.

Protecting the buy and hold investor is a major concern of financial services regulators around the world

Research by FT Interactive Data has estimated that approximately 50 billion euros of assets domiciled in the UK, Luxembourg and Ireland, but invested in North America and Asia, are potentially under threat from arbitrage. Where no measures are put in place FT Interactive Data has estimated that annual dilution of up to 250 basis points could be occurring.

Put another way: a buy-and-hold investor with ¤100,000 invested in an 'at risk' investment fund could have his or her total return reduced by up to ¤2,500 every year.

Regulatory response

Protecting the buy and hold investor is a major concern of financial services regulators around the world. In recent years many of the regulators, in conjunction with the local industry associations, have looked for ways to prevent investment fund arbitrage that occurs at the expense of the buy and hold investor.

In the US, the Securities and Exchange Commission (SEC) highlighted these concerns in an April 2001 letter to the Investment Company Institute (ICI). The SEC observed that appropriate use of fair value pricing in situations where current market quotations were not readily available would prevent the dilution of funds through arbitrage. This resulted in some mutual funds researching and implementing fair value pricing techniques.

However, it was not until the autumn of 2003 - when New York State Attorney General Elliot Spitzer launched an investigation into allegedly illegal and/or unfair trading schemes accommodated by mutual fund companies - that the use of fair value pricing became commonplace in the calculation of a fund's NAV.

Many European regulators and industry associations have also undertaken investigations to ascertain whether late trading or market timing has taken place in European investment funds. The Committee of European Securities Regulators (CESR) issued a report in November 2004 which brings together the findings of its member regulators' investigations. Their summary of the findings state that: 'There is evidence of efforts by some investors in Europe to get involved in the same kind of activities as discovered by the US authorities in the US mutual fund market'.

There is evidence of efforts by some investors in Europe to get involved in the same kind of activities as discovered by the US authorities in the US mutual fund market

The report highlights a number of approaches in the various European jurisdictions that a fund manager can adopt to deter market timers. These approaches include the introduction of redemption fees, moving the valuation time, the application of dilution levies, moving the order cut off time to prior to the market close, and the adoption of fair value pricing. This article focuses on the application of fair value pricing and the approaches available to fund managers on its adoption.

An introduction to fair value pricing

Unlike some of the other approaches mentioned, fair value pricing will affect all investors equally. It aims to reduce the arbitrage opportunity within funds investing in markets that are closed at their NAV calculation time by incorporating market information released after these markets close into the security value used in the fund's NAV calculation.

The Financial Services Authority's (FSA) New Collective Investment Schemes Sourcebook states that: 'where an authorised fund manager has reasonable grounds to believe that: (a) no reliable price exists for a security at valuation point or (b) the most recent price available does not reflect the authorised fund manager's best estimate of the value of a security, it should value an investment at a price which, in its opinion, reflects a fair and reasonable price for that investment (the fair value price)'.

Applying fair value pricing

The FSA highlights two circumstances where fair value pricing may be required:

1 there has been no recent trade in the security concerned; or

2 the occurrence of a significant event since the most recent closure of the market where the price of the security is taken.

The FSA defines a significant event as 'one that means the most recent price of a security or a basket of securities is materially different to the price that it is reasonably believed would exist at the valuation point had the relevant market been open'.

The difficulty for fund managers therefore lies in understanding what events would cause a materially different price. A paper released by the Investment Management Association (IMA) and the Depository and Trustee Association (DATA) lists a number of events that could trigger fair value pricing including market movements, natural disasters and government actions.

Research by FT Interactive Data finds that market fluctuations constitute the overwhelming majority - approximately 97 per cent - of significant events and may be considered the most important source of such events for two reasons:

1 significant market movements occur much more frequently than other events

2 market movements typically affect the value of most of a fund's assets, whereas other events usually affect only a portion of a fund's assets.

Furthermore this research suggests that volatility moves as small as 0.75 per cent in markets open at the time of valuation may represent significant events, since they can affect the value of a fund's securities.

Determining when to use fair value pricing instead of local close prices in the NAV calculation is a major concern for fund managers. A study by Deloitte and Touche in 2005 found that mutual funds in the US have begun to reduce their trigger level to implement fair value pricing on a more frequent basis. Over a 12-month period from 2003 to 2004 the year-to-year average trigger had decreased from 2.25 per cent to 0.73 per cent.

Approaches to fair value pricing

Upon determining that the fund should apply fair value pricing, the fund manager must consider a number of factors. These include whether a top-down or bottom-up approach is used (a single adjustment to the calculated NAV or an individual security adjustment) and the appropriateness of a single-versus multi-factor model.

Top-down versus bottom-up

A top-down approach applies a multiplier to the entire portfolio or to broad portfolio sectors. Such a methodology can be advantageous in that it is generally a less-costly and time-consuming approach to the implementation of fair valuation within a fund.

However, such an approach is fundamentally problematic because it will result in price adjustments to all securities and not only to those securities for which market quotations are not readily available: a sector may contain securities that are unaffected, even by a major event, and so should not be fair valued at all.

A top-down approach will also not take into account that different securities within a sector may be inversely related - an event that causes the price of one security to rise might cause others to fall. Finally, and most importantly, portfolios are constantly changing. Historical correlations between a portfolio and an index lose accuracy with every portfolio change (with the exception of index tracker funds). Thus a bottom-up approach, which focuses on individual securities, offers relatively greater accuracy than top-down methods that look at single markets or sectors.

A top-down approach will also not take into account that different securities within a sector may be inversely related

Single factor versus multi-factor

A single factor approach focuses on one market indicator to determine the fair value adjustment that is to be made to the security or the portfolio price to take into account the impact of a significant event.

Examples of single factor approaches include the use of a general index such as the S&P 500 or a 'Mark to ADR' approach. In contrast, a multi-factor approach uses a number of market indicators in the calculation of the fair value price.

If an arbitrageur is able to determine a fund's basis for its fair value adjustments, it can exploit that information

Research by FT Interactive Data indicates that a multi-factor approach is of greater utility to a fund that uses fair value pricing. The research conducted compares single factor and multi-factor models and concludes that where a fund relies too heavily on a single factor model in its fair valuation process, its fair value prices will differ predictably from the next day's opening price. If an arbitrageur is able to determine a fund's basis for its fair value adjustments, it can exploit that information. For example, by analysing the publicly-reported NAVs of a fund with Japanese holdings, a day trader might be able to conclude that the fund's fair value adjustments were directly linked only to the S&P 500 Index. On days when the S&P 500 fell but the Nikkei future did not follow it down, the next-day expected returns of this fund would be positive - and the arbitrageur could act accordingly.

Testing a fair value pricing model

Fund managers must also be able to test the appropriateness of their approach to fair value pricing. FT Interactive Data proposes that a properly-constructed fair value methodology should produce fair value estimates that are both closer to the next day's opening price than to the current day's local closing price and not inappropriately biased.

Appropriate tests could include:

1 Counting test: how often is the fair value adjusted price closer to the open than the local closing price?

2 Reduction in average absolute distance: by how much does the fair value adjustment reduce the distance to the next day's open? A measure of the degree of closeness

3 Arbitrage reduction test: how effective is the fair value adjustment in reducing arbitrage opportunities?

4 Lack of bias: fair value estimates should not be biased. If the estimate were consistently higher (or lower) than the next day's open, it would systematically increase (or decrease) a fund's net asset value. This is an undesirable feature of a model, which an arbitrageur could exploit

One remaining decision for fund managers is whether they should create their own model to determine fair value adjustments or use the services of a third party provider? The 2005 Deloitte and Touche Survey of US mutual funds found that: 'more than two out of three mutual fund groups surveyed (68 per cent) utilise third-party pricing vendors to determine fair value calculations for foreign securities, a staggering increase from 21 per cent in last year's survey'.

Fair Value Information Service

FT Interactive Data recently announced the general availability of its Fair Value Information Service to European-domiciled funds. This groundbreaking service was first introduced to the North American marketplace in July 2002 and has since built up a client list of over 120 US mutual fund and mutual fund processing subscribers, with three clients already using the service for European-domiciled funds.

The Fair Value Information Service offers investment fund companies a convenient and flexible tool to assist them in meeting their fair value requirements. The service is designed to provide subscribers with information that can be used to estimate a price that would likely prevail in a liquid market for equities traded on exchanges that closed prior to the NAV calculation time. It takes into consideration the latest market information available.

Using a multi-factor, security-specific model, the Fair Value Information Service creates an evaluated adjustment factor for each security which is essentially a multiplier that can be applied to the local closing price to adjust it for post-closing events. Access to the input, calculation and output data enables transparency for the fair value pricing model and the adjustment factor calculation.

Backed by FT Interactive Data's vast experience in collecting and analysing equity data, its Fair Value Information Service provides extensive global financial data coverage and offers a proven methodology, flexible delivery, plus a range of detailed report tools.

For further information please contact Catherine Downhill, FT Interactive Data. Tel: +44 (0)20 7825 8615 Email: catherine.downhill@interactivedata.com

FT Interactive Data, part of Interactive Data (NYSE:IDC), is a leading provider of financial information and analytical software to global markets.

The above article was produced by Interactive Data (Europe) Limited for information purposes only. Nothing therein should be construed as legal, tax or other professional advice or be relied upon as such.

Eric Zitzewitz, Who cares About Shareholders? Arbitrage-proofing Mutual Funds, Journal of Law, Economics and Organisation (2003).

Fair Value Pricing and Arbitrage Protection Association Luxembourgeoise des Fonds d'Investissement (2004)

Investigations of Mis-practises in the European Investment Fund Industry, The Committee of European Securities Regulators (2004)

Pricing Guidance for Investment Funds: Fair Value Pricing, IMA & DATA (2004)

Pinpointing a "Significant Event"; Volatility Events Far Exceed Natural Disasters and Government Action, FT Interactive Data, Peter Ciampi, (2002 revised 2003)

Deloitte Survey: Mutual Funds Continue Modifying Fair Valuation Policies, Deloitte & Touche (2005)

Fair Value Controversy, Top-down vs. Bottom-up, FT Interactive Data, Peter Ciampi 2001.Systematic Fair Value: Choosing Among the Available Aids, FT Interactive Data, Peter Ciampi and Eric Zitzewitz 2003.

Characteristics of Estimates from a Fair value Methodology; Comparing Alternative Models, FT Interactive Data, Peter Ciampi 2004.

Approaching your COLL Conversion - The Need for Unitholder Approval

COLL introduces increased product flexibility including wider investment and borrowing powers and of course the ability to invest in derivatives, subject to a risk management process.

Managers have to convert to COLL by 12 February 2007 at the latest. In converting, they need to consider whether they want to retain the existing investment and borrowing powers of the fund (for example the 5A Securities Schemes powers) or whether they want to avail themselves of the wider and more flexible powers of COLL, including UCITS III.

Whilst Managers will want to avail of many of these powers, very often a critical issue in the decision-making process is the extent to which they are able to take advantage of those wider powers without having to seek and obtain unitholder approval.

Unitholder approval is needed for fundamental changes. Per COLL 4.3.4, a change is fundamental if it:

· changes the purpose or nature of the scheme

· may materially prejudice a unitholder or

· Alters the risk profile of a scheme

The COLL Handbook also provides that a change will be fundamental if it is a change in the investment policy to allow the authorised fund to invest in derivatives as an investment strategy which increases its volatility.

Ultimately it is for the Manager to decide whether or not a particular change (or a package of changes when considered in totality) amounts to a fundamental change and hence requires unitholder approval.

Therefore, the Manager is required to exercise a degree of judgement. This is made difficult by the fact that, with few conversions having yet taken place, there is not necessarily established practice or precedent in place for Managers to refer to.

Therefore, in this article we endeavour to set out some key factors to be considered by the Manager, and discussed as appropriate with the Depositary and with the FSA.

General

CIS 5A Securities are required to be fully invested in transferable securities. The exception to this is that the regulations provide that up to 5% of the scheme may be in CIS (Collective Investment Schemes), 5% in warrants and that derivatives are permitted within the confines of efficient portfolio management (EPM). This compares to COLL UCITS funds where UCITS III permits the fund to invest up to 100% of the assets in any of transferable securities, derivatives, money market instruments or collective investment schemes.

CIS 5A/UCITS I

100% Transferable securities
5% CIS
5% warrants
Derivatives (limited to EPM)
Cash (up to 10% rule of thumb)

COLL UCITS/UCITS III

100% Transferable securities
100% CIS
100% Warrants
100% Derivatives (subject to risk management process)
100% Cash

The question arises as to whether a Manager can go beyond the limits for investment under CIS 5A without the need for unitholder approval. For example, even funds operating under COLL UCITS regulations generally restrict their investment in other CIS to 10% of the assets in order that those funds themselves remain eligible for investment into by other funds in accordance with COLL 5.2.13(3).

Therefore, what if a Manager converts the fund from 5A to COLL UCITS and, in so doing, wants simply to extend the amount that can be invested in other CIS from 5% to 10%, would that be a fundamental change requiring unitholder approval? It would be for the Manager to consider whether that change in itself changed the nature and purpose of the scheme, whether it materially prejudiced unitholders or increased the risk profile of the scheme.

A similar approach may be taken if a Manager wishes to formally provide in the prospectus that up to 10% of the fund may be invested in cash, deposits or money market instruments. Would this be a fundamental change given that under 5A schemes would often have 10% of the assets invested in cash from time to time in order to meet unitholder subscriptions and redemptions?

The difficulty for Managers is that the uncertainty surrounding the above considerations means that it is difficult to determine what is acceptable and what is not, before you need conclude the change is fundamental. Would it be appropriate for up to 10% of assets to be in these other instruments, would 20% or 100% also be appropriate? At what stage does it change the nature or purpose of the scheme? Is it sufficient that the investment objectives of the scheme remain unaffected or is the fact that the scheme may lose its characteristics as a securities scheme a decisive factor?

The question arises as to whether a Manager can go beyond the limits for investment under CIS 5A without the need for unitholder approval

This uncertainty is perhaps the price the industry pays for the move from prescriptive to principle-based regulation witnessed in the introduction of the COLL Handbook, a move which was widely applauded and welcomed by the industry. One Manager's judgement may differ from another's, with the effect that unitholders in one scheme will be asked to approve changes whereas that same role will not be granted to unitholders in another scheme in respect of an almost identical set of changes. No doubt, however, a greater harmonisation of approach will emerge as the industry - Managers, Trustees, lawyers and the FSA - become more familiar with the conversion of funds to COLL and standard methodologies for conversion emerge within the industry.

Below we look at derivatives usage and fund of funds conversions which present their own unique issues for consideration as regards the conversion process and the need for unitholder approval.

Can modest extensions to EPM be facilitated without the need for unitholder approval?

Derivatives Usage

Derivatives can reduce costs within a scheme (for example by avoiding stamp duties). They can yield more predictable returns, reduce volatility and also provide capital protection. In recognition of these potential benefits, UCITS III provided for more flexible derivative usage for authorised funds than that permitted under the overly-restrictive EPM regime. Of course, derivatives, if used inappropriately, can also lead to unexpected and significant losses and it is for that reason that UCITS III requires there to be an appropriate risk management process in place in respect of their usage.

That said, the reaction of many Managers to this more flexible use of derivatives has been very cautious, seeking incremental extensions to EPM derivatives usage rather than taking full advantage of the greater flexibility available under COLL. It can be questionable, therefore, whether a Manager would need unitholder approval in order to be able to make use of the wider derivatives powers under UCITS III, where that usage is going to be very limited in any case. An interesting question, therefore, is the extent to which you can move beyond EPM, as per the CIS 5A regulations without the need for unitholder approval. Can modest extensions to EPM be facilitated without the need for unitholder approval?

Extending the range of instrument types - the use of Swaps

Unless the derivative is an approved derivative, CIS 5A EPM only permits the usage of futures, options and contracts for differences (CFDs) resembling options. COLL is more flexible in that it allows for the usage of contracts for differences generally, not just those which resemble options. These are essentially swaps.

COLL is more flexible in that it allows for the usage of contracts for differences generally

The question then for the Manager is whether or not extending the use of eligible investments to include the general use of swaps would amount to a fundamental change. Conceivably the Manager could argue that the usage is still going to be confined to EPM and that, therefore, the nature and purpose of the scheme remains unchanged. Further, a Manager could potentially demonstrate that the swap will only be used to effect transactions that could have equally been achieved through usage of a combination of futures and options, the swap simply providing a more effective and accurate means of achieving that exposure. It would, of course, remain for the Manager to be able to demonstrate that the risk profile of the scheme and its volatility were unaffected by the usage of the swap as compared to the combination of futures and options.

The use of credit default swaps

If the conclusion is reached that the usage of derivatives can be extended to include swaps (albeit within the confines of EPM techniques), without the need for unitholder approval, by logical extension this would seem to clear the way for credit default swaps also to be used - again within the confines of EPM, without the need for unitholder approval.

Of course, to do so, the Manager would have to be able to demonstrate that the usage of these instruments did not impact on the risk profile or volatility of the scheme which may be a challenging prospect, especially where these instruments are being used to gain exposure to the credit markets, as opposed to hedging, whether on a temporary reduction of cost basis or on a tactical asset allocation basis to the extent permitted under CIS 5A EPM.

Interestingly, there is one school of legal thought that credit default swaps are not actually swaps at all but are rather either options or contracts for differences (CFDs) resembling options and hence, they would fall squarely within EPM even under CIS 5A.

The need for individual and global cover

EPM under 5A requires that there be both individual and global cover in place. COLL only has the requirement of global cover. If the Manager wished to move to COLL and to continue operating under EPM, but wished to operate with the requirement solely for global cover to be in place, again the Manager could perhaps reasonably argue that that is not a fundamental change - that it does not change the nature or purpose of the scheme, that it does not materially prejudice the unitholder and that it does not change the risk profile or volatility of the scheme.

The definition of a low-risk gain

EPM under CIS 5A allows for the usage of derivatives for the purpose of achieving a low-risk gain. However, low risk is defined as being where the benefit is "certain barring events which are not reasonably foreseeable." A Manager could potentially argue that this very strict definition could be relaxed without it necessarily being a fundamental change. For example, relaxation so that low risk is rather defined as "risk consistent with the investment objectives and policy of the scheme."

Derivatives usage otherwise than on a temporary basis

Under CIS 5A EPM, the Manager could, for example, where there is a large subscription into the scheme, buy an index future to gain exposure to a certain market and then unwind that futures position over time as he invests the subscription monies into the ordinary stock. Such an approach may in circumstances be justifiable, for example, under the reduction of cost rationale. However, an essential feature of such a strategy under CIS 5A would be that it is temporary in nature - "the authorised fund manager must intend that the authorised fund should invest in transferable securities within a reasonable time."

The question therefore is, what if the Manager, as part of the COLL conversion, wants to continue to utilise derivatives under EPM except that this usage need not be on a temporary basis - would that be a fundamental change?

If the Manager, as part of the COLL conversion, wants to continue to utilise derivatives under EPM except that this usage need not be on a temporary basis - would that be a fundamental change?

As stated at the beginning of the article, the Guidance in the COLL Handbook states that it will be a fundamental change where it is "a change in the investment policy to allow the authorised fund to invest in derivatives as an investment strategy which increases its volatility." The implication of this drafting is that it will not necessarily be a fundamental change where it is a change in the investment policy to allow the fund to invest in derivatives so long as that investment policy does not change the volatility of the scheme.

Even if this logic were accepted and it can be demonstrated that there will be no change in the volatility of the scheme, the Manager would still need to be able to demonstrate that there would be no material prejudice to the unitholder and that there would be no increase in the risk profile of the scheme. The Manager would also need to show that the nature and purpose of the scheme remains unchanged. This raises the question of just how much exposure a Manager can take in the fund through derivatives before the "nature and purpose of the scheme" is changed from that of a securities scheme - 1%, 10%, 100%?

Fund of Fund Schemes

Conversions of Fund of Funds schemes raise the same issues as considered above. Fund of funds under CIS 5A are non-UCITS schemes but typically convert either into COLL UCITS or COLL Non-UCITS retail schemes (NURSE). Especially where the Manager wishes to avail himself of the ability to invest in any other instruments than CIS (eg to also invest in transferable securities, money market instruments, deposits or derivatives), it will need to consider whether the usage of such instruments and the extent of usage of such instruments:

· Changes the nature or purpose of the scheme

· May materially prejudice unitholders

· Increases the risk profile of the scheme

It is worth also noting that there are different spread and concentration rules between CIS 5A fund of funds and COLL UCITS and NURSE schemes. For example, under CIS 5A spread rules a holding in another CIS is limited to 20% of the assets whereas for Non-UCITS retail schemes this is extended to 35% of the assets. If the Manager wishes to adopt these more flexible spread rules, it could change the nature and risk profile of the scheme as it would lead to the fund potentially having greater exposure to a single fund. The Manager will need to consider this.

Final Thoughts

Above we considered a series of individual changes to the investment and borrowing powers of the fund and considered in extract whether and on what basis the Manager could make the case that a change is not fundamental in nature and does not require unitholder approval.

However, it will be important that a Manager not only looks at each change individually but also considers the totality of all the changes proposed as part of the COLL conversion and on that basis determines whether or not the changes are fundamental in nature and therefore whether or not it is appropriate and necessary to obtain unitholder approval before proceeding to convert on that basis. Any change may be fundamental depending on its degree of materiality and effect on the scheme and its unitholders. Whether or not a change is fundamental needs to be considered having regard to all the facts particular to each case.

Whether or not a change is fundamental needs to be considered having regard to all the facts particular to each case

Whilst it is ultimately for an authorised fund manager to determine whether in each case a particular change is fundamental in nature or not, it is important that the interest and expectations of unitholders remain the primary consideration. It is also right and proper that a Manager fully engages the Depositary/Trustee and also, if appropriate, the FSA in respect of this decision-making process where there is any question over whether a change is fundamental or not.

Bundled Brokerage and Soft Commission: FSA details proposed rules for investment managers to follow in dealing with institutional clients

In the March 2005 edition of News & Views UK, we wrote about the ongoing developments within the industry concerning bundled brokerage and soft commission arrangements. The genesis of this topic goes back to April 2003, when CP176 'Bundled brokerage and soft commission arrangements' was issued by the FSA. In line with the FSA's preferred route of 'industry-led' solutions, following subsequent industry-wide discussion and two policy statements (PS 04/13 and PS 04/23 respectively) and a consultation paper (CP 05/5), Policy Statement 05/9 'Bundled Brokerage and Soft Commission Arrangements: Proposed Rules' was issued in July 2005, setting out the FSA's proposed rules for dealing with this issue. Full details can be found in the FSA Handbook. This article summarises PS 05/9 and what the proposed rules will entail. Note that these proposals do not address the position of investors in retail investment funds.

Effective Date and Transitional Arrangements

The new rules will be effective from 1st January 2006. The transitional period allows for firms to comply with the existing soft commission rules (under COB 2.2.8R-COB 2.2.20R(1) respectively) until the earlier of the expiry of any current soft commission arrangements, or 30th June 2006.

Disclosure

The FSA has decided that in line with its stated objective of adopting a "principles-based" approach, it is appropriate that investment managers should themselves make the decision on whether execution and research services should be paid for with commission. In this context, it will be incumbent upon investment managers to ensure that customers are made aware of such arrangements via adequate disclosure. Whilst leaving it up to individual investment managers on how best to approach the disclosure issue, the FSA believes that the IMA Disclosure Code will become the standard for disclosing levels of commission, at least for UK institutional and retail funds. This will require firms to make Level 1 disclosures annually and Level 2 disclosures at least every six months. (Note: Level 1 refers to details on the policies, processes and procedures of the investment manager in managing costs paid on behalf of clients, while Level 2 contains specific information on how commissions paid have been generated and what use they have been put to, including the split between commission spent on execution and research). However, flexibility is provided for to allow alternative disclosure methods. The FSA will continue to monitor disclosure levels to determine whether expected outcomes are achieved.

The IMA had recommended the additional disclosure of dealing commission arrangements to trustees and depositories of unit trusts and ICVCs respectively and the FSA has committed itself shortly to publish proposals for consultation on this point.

The FSA believes that there must be an element of 'originality' to enable research to be purchased with commission

Post-Trade Analytics

The FSA has taken the view that while the market has produced complex and sophisticated analytical IT products (classified generally under the 'post-trade analytics' banner), these should not be included within the category of goods and services that can be purchased with commission. It is recognised, however, that information about how well transactions are handled by brokers on behalf of investment managers, could fall within the 'execution' category.

Raw Data Feeds

The FSA does not view raw data feeds as research, unless it is used for additional, meaningful output. The FSA believes that there must be an element of 'originality' to enable research to be purchased with commission. Whether raw data feeds qualify as execution, will depend on the justification provided by the investment manager.

Territory

The rules will apply to investment management activities carried out in the UK. Whilst it would not be possible for overseas brokers to provide information on commission, the FSA does expect investment managers to request information on the split between execution and research services as they would from UK brokers, in order to manage any "conflicts of interest".

Permitted versus non-permitted services

As part of the consultation process, some of the respondents to CP 05/5 argued that any services which did not appear on the non-permitted services list (including services relating to the valuation or performance measurements of portfolios, computer hardware, dedicated telephone lines, seminar fees, subscriptions for publications, travel, accommodation or entertainment costs, membership fees for professional associations, or employee salaries), should be allowed to be purchased with commission, as long as they were capable of being justified by the investment manager. The FSA is not keen to extend the parameters of what could be deemed to be a "permitted service". Therefore, while it ultimately rests with the investment manager to determine whether a service is "non permitted", due care and attention must be paid to the limitations set by the FSA to ensure that there is industry-wide consistency of approach.

Responsibility of Brokers

Whilst rules in COB 7.18 (use of dealing commissions) apply to investment managers and not to brokers, the FSA has pointed out that all firms are subject to the inducement rule contained within COB 2.2.3R as well as Principles for Business 1 which obliges firms to conduct its business with integrity. In relation to any record-keeping requirements of brokers, the FSA remains silent. However, the FSA expects that details pertaining to commercial arrangements between brokers and investment managers

(eg explicit and/or indicative rates for execution) will be capable of being retrieved if required.

VAT

The Consultation Paper states that HM Revenue & Customs has confirmed that any VAT liability will remain unaltered by any new disclosure codes. Any research or advice functions will be deemed to be ancillary to exempt execution services. Where there is a separate contract in place for the provision of research and advice services, this will be subject to VAT at the standard rate, as is the norm.

UK-based solutions are not dependent upon potential changes in the US regulatory landscape

Softing

As noted by the FSA in its paper, in the US the SEC is currently undertaking a review of 'soft dollar' arrangements, and the FSA intends to proceed with discussions that it is having with the SEC in relation to these issues.

However, any UK-based solutions are not dependent upon potential changes in the US regulatory landscape.

The Future

The FSA intends to work closely with the IMA, National Association of Pension Funds (NAPF) and the London Investment Banking Association (LIBA) in the development of measures to determine what impact the proposed rules will have. Whilst in the short-term the focus will be on the changes to current practices as the new measures are introduced, we believe it is the FSA's intention to include within its Business Plan for 2006/2007, plans for 'performance assessment measures' to gauge whether its stated objectives have been met.

Summary of Consultation Paper 05/13 - 'Bundled brokerage and soft commission arrangements for retail investment funds'

The FSA issued Policy Statement 05/09 'Bundled Brokerage and Soft Commission Arrangements: Proposed Rules' in July 2005. Our previous article has covered this. However, the proposals outlined in PS 05/09 do not cover investors in retail investments funds (including authorised unit trusts and open-ended investment companies).

Whilst the FSA has endorsed a "disclosure-based" solution for institutional clients, this approach (they feel) may not be suitable for private investors, due to a lack of required market knowledge.

The FSA is proposing that an individual or a body (a so-called "investor's representative") represent the interests of retail investors by considering the disclosures on behalf of investors and subsequently interacting with the investment manager, as appropriate. The question arises as to who this individual/body should be? The Consultation Paper has outlined possible suggestions as follows:

1 The Depositary/Trustee for collective investment schemes

2 Directors of the company for investment trusts

3 The committee or appointee to review compliance in the case of with-profits funds and

4 In the case of unit-linked funds, the independent directors of the company, actuary or the with-profits committee (if it exists).

The FSA plans to have a three-month consultation process which will end on January 6th 2006. It hopes to be able to publish feedback after the end of the first quarter 2006, with the effective date for the introduction of rules and guidance currently likely to be 1st July 2006.

The changing face of ARROW and how you can prepare for an ARROW assessment

by Lyndon Nelson, Risk Department (Finance, Strategy & Risk Division) of the Financial Services Authority

The FSA is currently implementing changes to its ARROW framework. The ARROW framework guides the way in which we risk-assess and supervise firms, and some of the changes will result in visible differences for regulated firms.

The FSA launched ARROW in January 2001 in 'New Regulator for the New Millennium'. ARROW is central to the FSA's operation as a risk-based regulator, and it is this risk-based approach that is widely recognised as putting the FSA at the forefront of international regulatory best practice. Given the broad scope of the remit and the wide range of firms supervised, ARROW is rightly regarded as a good product.

However, the FSA recognised the need to review the operation of ARROW in its first few years and to draw on lessons learned. The very substantial increase in the number of smaller firms brought into the regulatory remit by Mortgage & General Insurance regulation provided an ideal opportunity for this. In reviewing the practical operation of the ARROW frameworks, the FSA has received feedback from a wide variety of stakeholders including regulated firms, trade associations and supervisors and has sought to ensure that the ARROW methodology remains central to how the FSA operates as a risk-based regulator.

What is ARROW?

ARROW is the methodology used by the FSA to undertake risk-based regulation, including the supervision of individual firms within our remit of responsibility, and thematic work covering actions relating to consumers, sectors or multiple firms. ARROW is used to analyse risks to our statutory objectives and to decide on appropriate responses.

The diagram outlines the fundamental principles of the ARROW framework, including the risk cycle. The ARROW methodology is grounded in identifying, assessing, prioritising and mitigating risks that arise from whatever source, including individual firms, which may impact on our statutory objectives. The methodology is designed to aid the FSA in prioritising the biggest risks and allocating suitable and sufficient resources and regulatory tools to them.

In supervising firms, the ARROW methodology directs the supervisor to make an assessment of the probability of business and control risks occurring within a firm and the impact, should they occur. This assessment drives the resources allocated to, and intensity of, the supervision of the firm by the FSA.

Although we are making changes to ARROW, the fundamentals of the methodology remain. However, we are making some amendments to associated procedures to improve ARROW's practical operation. An understanding of the basis of our ARROW approach is key to preparing for an ARROW visit.

What is changing?

The current ARROW project aims to address concerns that have arisen from a variety of stakeholders, both internal and external, about both the firm facing and thematic frameworks. Changes to the vertical (or firm facing framework) will be most visible to practitioners. The ARROW project is working towards a number of key outcomes, and those that will affect a firm's experience of an ARROW assessment are outlined below.

This assessment drives the resources allocated to, and intensity of, the supervision of the firm by the FSA

Better communication with firms concerning our assessment of them

We have planned a number of changes to the process to help improve our communication with firms. In particular, the ARROW assessment letters to firms have been extensively revised to provide more focus on the main issues and what we expect firms to do about them. They will give firms a more helpful explanation of our view of the risks and how we view individual firms in the context of their peers. Following the roll-out of the new style letter, firms will be provided with draft copies of ARROW letters and risk mitigation programmes (RMPs) to allow correction of factual inaccuracies and misunderstandings and reduce surprises in the final letters.

Greater efficiency and effectiveness

In the near future we plan to make more and better use of thematic working by developing enhanced processes to identify those risks within firms that would be better dealt with through thematic working. In addition, we are developing and testing tools that will allow supervisors to leverage off the knowledge of the wider organisation, such as the work of sector experts and the experience gained from supervising other similar firms. These streamlined processes and improved IT support for supervisors will cut down on wasted time and allow supervisors to focus on the risks that matter.

Greater proportionality and consistency in response to risks - applying our resources where they will make the most difference

We are currently conducting a major overhaul to our risk framework to allow better comparison of risks in different areas, so that we can more reliably devote resources to the greatest areas of risk. We will also be exploring and testing options for placing greater reliance on well-controlled firms in our assessment work, which would allow for a lighter touch in these cases as well as a more informed assessment that makes better use of firms' own knowledge of the risks.

Improved skills and supervisory knowledge of staff

We are building on our current training and development provision for staff to provide them with more effective and comprehensive support and guidance to help them assess and mitigate the key risks that we face. In the near future we will plan to operate a training syllabus, similar to that for a professional qualification and leverage, as far as possible, off the industry's own training programmes whilst continuing to build on our extensive use of secondments.

How can you prepare for an ARROW visit?

An understanding of the FSA's risk-based approach is fundamental to a successful ARROW visit. When preparing for a visit, always remember that the FSA will be focused on assessing the risks that your firm may pose to the FSA's statutory objectives. The key to a productive ARROW assessment lies in preparation - thorough preparation will pay dividends by ensuring that you appear focused and coordinated.

Pre-assessment

You will find an indication of what is likely to come up in the assessment from the pre-visit information request. Taking time to prepare this information will help ease the assessment. Simple things, such as ensuring your firms' abbreviations are decoded, can aid understanding. Don't be afraid to prepare summaries of key issues and projects, rather than providing a full "blow-by-blow" account in the first instance. Take note of the FSA's Financial Risk Outlook and Business Plan - these will indicate the key areas that the FSA is focusing on. In the same vein, make sure you keep up to speed with what the FSA Sector Leaders are saying as sector priorities also feed supervisory priorities.

Many firms have benefited from having a close of day debrief on what issues have come up during the FSA interviews

At this stage, also remember to keep in touch with your relationship manager - relationship management is a two way street, and an ARROW visit without surprises for the relationship manager is more likely to be a good visit for the firm.

Brief those who are likely to be interviewed. If they have a clear understanding of the FSA's aims and objectives this will help keep the interview focused. For those who have no previous experience of an ARROW assessment it may be useful to hold mock interviews. Encourage those who are being interviewed to bring key documents with them. They should have the detail to hand, but be ready to present the high level first. Remember that the FSA assesses risk in terms of business and control risk, and framing issues in this context can help get your points across clearly and concisely.

Assessment

During the visit you can stay on top of things by having a dedicated place that your staff can go to receive briefings. Agree with the FSA whether there will be note takers in meetings. Be prepared to accept that the FSA for some meetings may not feel a note taker is appropriate or perhaps a note taker from a certain area for that meeting. Many firms have benefited from having a close of day debrief on what issues have come up during the FSA interviews. It would help to provide the FSA with somewhere to work and carry out some interviews, but again don't be surprised if the FSA asks to hold some meetings in interviewees' offices.

Post assessment

Following the changes made to the post-assessment communication process, draft letters and risk mitigation programmes (RMPs) will be sent to firms. This is the stage at which you should ask questions about anything that is unclear. If you want to negotiate on anything in the draft letter or RMP then make sure you base your negotiations on outcomes if you feel you can achieve the same outcome that the supervisor wants but in a different way, that may be more timely or effective for you, then put that case. Your supervisor will consider your comments before sending a final version of the letter and RMP to the Board.

We feel that it is in the interests of both regulator and regulated that the ARROW risk assessment is as appropriate to the firm's risk profile as possible. Although it may be too much to hope that it is an experience that will always be enthusiastically welcomed, we hope that the changes we are making will foster more understanding and cooperation. This will lead to a more efficient and effective process and help make the FSA easier to do business with.

Carbon funds: Which Instruments, which Strategies?

In the August 2005 issue of News & Views we commenced looking into the Kyoto Protocol and the mechanisms under which a carbon market is established. In this edition, we want to discuss in more detail the options that are available for an investment manager willing to enter into this new business.

The Kyoto protocol calls for industrialised countries (or "Annex I" countries, as defined under the protocol) to reduce their greenhouse gas ("GHG") emissions to below 1990 levels by the period 2008-2012. The mechanisms under which this target should be met are, according to the protocol, joint implementation ("JI"), clean development mechanism ("CDM") and emissions trading ("ET").

CERs, ERUs, or emission allowances?

We stated in our August 2005 edition that under MiFID, greenhouse gas allowances are defined as "financial instruments". The way these instruments can be transacted (or "carbon transactions") can be grouped into two main categories.

The first category includes project-based transactions, in which the buyer purchases emission credits from a project that reduces GHG emissions compared to what would happen otherwise. These are:

· CERs (certified emission reductions) are units of greenhouse gas emission reductions, issued pursuant to the clean development mechanism.

· ERUs (emission reduction units) are units of greenhouse gas emissions reductions issued pursuant to the joint implementation mechanism.

Both CERs and ERUs are measured in tons of carbon dioxide equivalent.

The second category includes allowance-based transactions, as created and allocated (or auctioned) by regulators under the cap-and-trade regimes, such as the "assigned amount units" ("AAUs") under the Kyoto protocol, and the EU emission allowances under the EU emission-trading scheme (EU ETS).

The main difference between CERs and ERUs on one side and the AAUs and EU emission allowances on the other is that the latter are emission certificates already available for trading while the former will exist once the projects they are related to reach a successful completion. Since ERUs and CERs are project-related credits that will then be available at the end of a project cycle, funds can currently invest their money into these projects with the aim of receiving, at a later stage, the credits generated.

It is also possible for a fund to invest directly in emission allowances under, for example, the EU emission trading scheme (EU ETS).

There is no fundamental difference in quality between project-based credits and allowances, once the former are issued

There is no fundamental difference in quality between project-based credits and allowances, once the former are issued. Nevertheless, investing into either category requires a very different approach, as project-based transactions are the result of a venture capital type of business, while allowance-based transactions do not present material differences in comparison with the investment into any other financial instrument.

Previous experiences -the World Bank

The World Bank has given impetus to carbon financing thanks to a series of "carbon funds" with public and private participant. The first "prototype carbon fund" (PCF) was followed by the "Netherlands JI" fund, the "Netherlands CDM" fund, "Community Development Carbon Fund - (CDCF)", "Bio Carbon Fund", "Italian Carbon Fund", "Spanish Carbon Fund" and the "Danish Carbon Fund". Work is now underway to establish a ninth fund ("Pan European Carbon Fund") in conjunction with the European Investment Bank.

All of these funds are public or public-private partnerships managed by the World Bank as trustee. They operate much like a closed-end mutual fund, purchasing greenhouse gas emission reductions from projects in the developing countries or in countries with economies in transition, and paying on the delivery of those emission reductions.

The emission reductions can be used to meet obligations under the Kyoto Protocol or for other regulated or voluntary greenhouse gas emission reduction regimes. All the emission reduction credits are purchased on behalf of the public and private sector participants in the funds.

Private sector

One of the first notable experiences for a private-sponsored fund investing in the carbon market is the European Carbon Fund (ECF), established under the Luxembourg law of 19 July 1991 in the form of a SICAV (société d'investissement à capitale variable).

Bearing in mind that at this stage no UCITS fund is allowed to invest directly in carbon emission allowances or similar instruments (CESR's work on the definition of eligible assets for UCIS does not take any of these instruments into consideration), one could ask what kind of vehicles and investment strategies are available for an asset manager willing to explore these new market opportunities.

If we limit our analysis to the Luxembourg market, we can see several possibilities, bearing in mind that these are only suggestions and that any interested promoter should seek local specialists' advice.

In terms of legal form, for the moment, let us leave UCITS outside the picture. As the Commission de Surveillance du Secteur Financier ("CSSF") has already approved the above-mentioned ECF, a fund investing in the carbon market can be established as a Part II SICAV and sold to institutional investors. Similarly, it should be possible to obtain CSSF approval for a Part II fond commun de placement (FCP).

Equally possible (and probably the best solution for investment into CERs and ERUs), should be the establishment of a private equity fund as a SICAR (société d'investissement en capitale à risque). SICARs are extremely flexible vehicles and despite having been only recently introduced in Luxembourg (with the law of 15 June 2004) they are very popular vehicles in the private equity sector.

CESR's advice is now that listed closed-end investment funds should be considered as transferable securities

In terms of investment strategy, this is an area where it is difficult to make suggestions. Generating CERs and ERUs requires a long-term commitment, because these are the outcome of development projects. Trading allowances, on the other hand, is pretty much like trading into any kind of financial instrument.

And UCITS?

As we have previously stated, greenhouse gas allowances are financial instruments which are not eligible for UCITS investment and CESR is not currently considering them as part of its ongoing project on the definition of eligible assets for UCITS.

Nevertheless, CESR's advice is now that listed closed-end investment funds should be considered as transferable securities.

In this respect, a non-UCITS listed fund investing in carbon allowances (or in carbon allowances generating projects) could be an eligible asset for UCITS investment.

Also, an alternative to be investigated could be investing into derivative instruments to gain exposure to a "carbon index".

The carbon market is still a developing one. Few regulators have faced so far the difficulties of assessing the implications of approving a carbon fund established under the existing legal framework.

Time will tell whether or not the tools currently available to the investment fund business provide for a valid infrastructure for this kind of investment - and only time will tell if carbon finance is here to stay.

CESR's second consultation on eligible assets for UCITS

In March 2005, the Committee of European Securities Regulators ("CESR") commenced a consultation process on eligible assets for investment of UCITS (Undertaking for Collective Investment in Transferable Securities), which closed on July 2005. In consideration of the number and contents of the answers received (amongst which is the Citigroup's Fiduciary Services response), a second consultation was undertaken which closed on 21 November 2005. This article analyses the contents of the new consultation paper, and its possible impact.

In our previous issue of News & Views Luxembourg we discussed in detail the contents of the first consultation paper. On 20 October 2005, CESR announced in a press release the publication of a reviewed "draft advice on clarifications of definitions concerning eligible assets for UCITS".

Having attended the open hearing recently organised in Brussels by the European Commission on the EC green paper on the future of the asset management industry, we gained additional insight into the main drivers for this consultation and of the European regulators which we share to a large extent. In substance, there are two key points which should be considered: a) UCITS is a product which has to provide for a secure, diversified investment in transferable securities, and as such attention should be paid not to stretch its features to cater for a vehicle for a different kind of investment (eg: private equity, hedge funds, properties); b) the agreement on eligible assets will ultimately enable true passporting for UCITS, avoid that process of quasi-authorisation (instead of notification, as it should be) which is considered by most asset managers to be the main barrier to the establishment of a pan-European fund business.

Main developments

The new consultation paper is a refined version of the previous one, and CESR has outlined the areas which have raised most concerns amongst participants:

· Liquidity of transferable securities

· Eligibility of closed-end funds

· Valuation of money market instruments ("MMIs")

· Eligibility of derivative instruments on financial indices;

· Index-replicating UCITS

Following participants' requests, CESR has also better clarified the distinction between possible comitology measures at Level 2, and issues to be addressed at Level 3 (under the Lamfalussy approach).

For those who are not fully conversant with the Lamfalussy approach, this is the methodology applied for speeding up the process for developing and implementing European legislation, which is based upon four "levels":

· Level 1: Framework Directives

· Level 2: Detailed measures (either Directives or Regulations)

· Level 3: Standards and guidelines for implementations by national supervisors (CESR's level, basically)

· Level 4: Increased emphasis on enforcement and monitoring of compliance with EU law.

From our point of view, the following are the points that should be noted -but we suggest you read the new document carefully and compare it with the previous consultation paper.

Be prepared

Before providing a detailed analysis of the consultation paper, it is interesting to note that most of the respondents stressed the need to introduce transitional arrangements for those UCITS having already been authorised by a Member State but which cease to be UCITS as a result of CESR's clarifications on eligible assets.

We think it is worth quoting CESR directly in this respect: "It is noted that many CESR members have expressed the need to achieve rapidly a level playing field on the issue of eligible assets between member states. When implementing UCITS III, some member states have interpreted the directive as allowing large flexibility on the choice of eligible assets, while others have taken a more risk-adverse approach, with a strict adherence to the investor protection safeguards of the directive. To achieve a level playing field within the necessary timetable, the possible transitional arrangements can only be of a very limited nature."

So, if you are planning to launch shortly a UCITS III fund, our recommendation is to consider carefully CESR and the text of Directive 2001/108/EC.

So, if you are planning to launch shortly a UCITS III fund, our recommendation is to consider carefully CESR and the text of Directive 2001/108/EC

Definition of transferable securities

The new consultation paper provides, in the first instance, a more detailed definition of "transferable security". CESR has reviewed its position, and now identifies five required features for a transferable security to be defined as such, apart from compliance with Article 1(8) of the Directive:

· The security must not expose the UCITS to loss beyond the amount paid for it or where it is a partly-paid security, to be paid for it;

· The liquidity of the security must not compromise the UCITS' ability to re-purchase or redeem its units upon request (Article 37 of the UCITS directive);

· There must be accurate, reliable and regular prices, either being market prices or prices made available by valuation systems independent from issuers;

· There must be regular, accurate and comprehensive information available to the market on the security or, where relevant, on the portfolio of the security;

· The security must be freely negotiable on the capital markets.

In addition to the above, compliance with investment objectives, inclusion in the risk management process and embedded derivative positions will have to be considered.

CESR has also reviewed the definition of "liquidity" provided in the March consultation, first by taking the position that "there is a presumption, but not a guarantee, that transferable securities admitted to trading on a regulated market... are liquid". Such presumption does not apply if the UCITS knows, or ought reasonably to know, that a particular security is not liquid.

In this case, the UCITS must assess the liquidity risk considering matters such as: volume and turnover in the transferable security, how is the price of the security determined on the market, historic bid-offer prices, number of secondary market intermediaries and market makers.

Finally, the security's risk and its contribution to the overall risk profile of the portfolio must be assessed on an ongoing basis.

Other transferable securities and closed-end funds

CESR's review focuses on "other transferable securities" and on the critical issue of investment into closed-end funds.

In terms of other transferable securities in general, CESR has provided more detailed advice and, rather than referring to the text of the directive, has again identified also in this case the basic criteria for eligibility, which widely match those applied to normal transferable securities:

· The exposure, liquidity and negotiability criteria match exactly those applied to transferable securities.

· There must be a valuation of the security available on a periodic basis, which is derived from information from the issuer of the security or from competent investment search.

· There must be regular and accurate information available to the market on the security or, where relevant, on the portfolio of the security.

Compliance with investment objectives, inclusion in the risk management process and consideration of embedded derivative positions are still requisites to be met.

This definition is open to interpretation, most of all with respect to the definition of "appropriate investment safeguards"

The main difference between the old and the new approach is that now the presumption of liquidity does not apply, the onus to assess liquidity falling fully upon the UCITS.

In terms of eligibility of closed-end funds, the initial position from CESR was that such investments were comparable to investments in transferable securities, as long as they complied with the requirements of the Directive. Nevertheless, CESR also required additional criteria to be met in terms of investors' protection, which have been criticised by industry players as excessively restrictive. CESR has since partially reviewed its position, and requires the following additional criteria to be considered to define eligibility of a closed-end fund:

· The asset management activity carried on by or on behalf of the closed-end fund must be subject to appropriate investors' protection safeguards.

· UCITS may not make investments in closed-end funds for the purpose of circumventing the investment limits provided for UCITS by the Directive.

· Closed end funds in contractual form are eligible where their corporate governance mechanisms are equivalent to those applied to companies generally.

We believe that this definition will probably not fully satisfy the fund industry, as it is open for interpretation, most of all with respect to the definition of "appropriate investment safeguards".

Money market instruments

The Directive defines under Article 1(9) money market instruments ("MMIs") as "instruments normally traded on the money market which are liquid, and have a value which can be accurately determined at any time".

The initial CESR advice has been refined with respect to the definition of "liquidity", "determination of price" and "dealt on the money market".

· In terms of liquidity, the criterion is now less prescriptive, simply stating that an instrument is liquid if it "can be sold at a limited cost in an adequate short timeframe", and taking into account the need for a UCITS to be capable of repurchasing or redeeming units upon the unitholder request.

· In respect of the need for the value to be accurately determined at any time, while initially CESR was of the view that it was the UCITS' duty to ensure that accurate and reliable valuations were available, now the approach is, more pragmatically, that MMIs meet this requirement if accurate and reliable systems (which can be based on market data or valuation models, including amortised cost methodology) are available to enable the UCITS "to calculate a net asset value in accordance with the value at which MMIs held in the portfolio could be exchanged between knowledgeable, willing parties in an arm's length transaction".

· Finally, as far as the criterion of being normally dealt on the money market is concerned, this will include instruments with a residual maturity up to 12 months, or regular yield adjustment in line with money market conditions at least every 12 months.

Without getting into excessive detail, under the new consultation paper, as far as MMIs are concerned:

· "liquidity" will have to be assessed cumulatively at instrument level and at fund level, to allow the UCITS structuring the portfolio on the basis of the anticipated cash flows required to meet redemptions requests

· in terms of valuation methodologies, CESR originally suggested that valuations methods, when based on models such as discounted cash flows, had to include a credit risk assessment. This seemed to rule out the possibility of using the amortisation methodology. CESR has reviewed its approach and now accepts that an amortisation methodology can be used if that will not result in a material discrepancy in the value of the MMI. This will generally be the case (but nothing seems to prevent applying the methodology to other money market instruments) for MMIs with a residual maturity of less than three months or residual maturity of less than one year or for high-quality instruments (but the concept of quality is not defined) with residual maturity of no more than one year or regular yield adjustment in line with what said above, and a weighted average maturity of 60 days.

· The fact of being traded in a regulated market provides a presumption that the criteria of "liquidity" and of "accurate evaluation" are complied with. Whenever the UCITS "believes that this presumption should not be relied upon", the MMI should be subject to adequate assessment.

Financial derivative instruments

The draft advice focuses also on "techniques and instruments", "embedded derivatives", and "other collective investment undertakings" -we suggest you to read the CESR's document if you are interested in these specific points.

The industry has shown a strong interest in allowing derivatives on financial indices based on non-eligible assets

In terms of financial derivative instruments, however, CESR's position since the beginning has been that, for a derivative to be an eligible instrument, the underlying has to be an eligible asset itself.

The industry has shown a strong interest in allowing derivatives on financial indices based on non-eligible assets, and the new CESR advice pays particular attention to this aspect.

CESR suggests that, since the UCITS Directive states, on Article 21(3) that "member states may allow that, when a UCITS invests in index-based financial derivative instruments, these investments do not have to be combined to the limits laid down in Article 22" (ie risk-spreading rules), UCITS investing in derivative instruments on financial indices do not have to look-through. Nevertheless, CESR also argues that the Directive does not rule whether or not these indices should be based solely on eligible assets.

On the other hand, the Directive requires index-replicating UCITS, as per Article 22a, to comply with certain risk-spreading rules. Subsequently, CESR's opinion is that derivative instruments on financial indices should be eligible only if the index complies with the requirements set under Article 22a, or a UCITS could have the possibility of gaining exposure to a portfolio of assets that would not comply with Article 22a, thus circumventing this article.

In brief, CESR's advice is that financial derivative instruments which are based on a financial index are eligible, if the index:

· Complies at least with the criteria and risk-spreading rules as per Article 22a

· Complies with additional criteria regarding index management process, transparency, and contract design for the purpose of ensuring investor protection.

This second set of criteria will probably be deeply debated before the final CESR advice is issued.

Index replicating UCITS

In terms of index replicating UCITS, the first consultation, inter alia, suggested a common methodology for tracking errors in consistent manner.

CESR had proposed two different methodologies for this purpose, but the general feedback from the industry has been unclear. In addition, certain respondents have been reluctant to adopt a standardised methodology, so CESR's advice calls upon professional associations to identify a suitable methodology for assessing the quality of index replication.

Conclusions

As mentioned, the consultation closed on 21 November 2005. To facilitate the process, an open hearing was held on 7 November 2005 at CESR's premises which was attended also by Citigroup Fiduciary Services.

The outcome of the open hearing and the comments received in the consultation process will help in defining the contents of CESR's final advice to the European commission, which is due for January 2006.

Mr McCreevy, European Commissioner for Internal Market and Services stated at the recently-held open hearing on the EC green paper on the future of the asset management industry, "I will want to be convinced that there is a cast-iron case before launching far-reaching change to existing European law in this field. I will not kick-start the regulatory machine for marginal benefits".

Accordingly, we believe this may have been one of the last occasions for quite some time, to address any concerns on the existing investment limits framework for UCITS.

A New Opportunity: Pan-European Pension Fund Pooling

At a time when state-run public pensions schemes with large commitments, but without capital cover, can no longer be expected to provide a level of pension funding that will suffice to provide a comfortable retirement, the debate over private pension planning is the hot topic on the political agenda of the European Union and of all Member States. In this article we provide an overview of the techniques and instruments available to meet the "pension challenge".

Because of the ageing population (causing the age pyramid to become more and more distorted), increasing levels of unemployment and slow economic growth in Europe, two incremental sources of funding for retirement planning gain in importance.

Firstly, private savings out of net income. As more and more people begin to understand the importance of private savings, the need to invest this money will increase and with this the demand for investment funds as the majority of private savings is set to flow in this direction. That part of the working population that currently contributes via social charges deducted from salaries in order to pay for the pensions of the current pensioners (their parent generation) faces the challenge of simultaneously having to build up private savings for their own retirement as well as bearing the cost of bringing up and paying for the education of the next generation -a truly "sandwiched" generation.

The second source of additional funding, which is already well established, but will become even more important as one of the central pillars of retirement planning is corporate pension plans. Traditional corporate pension plans operate at national level, ie multi-national corporations run multiple corporate plans in each country where they have a presence. In this context, pan-European pension fund pooling creates opportunities to realise significant efficiency gains that will translate into lower costs. This not only reduces the impact of pension plans on the bottom line of the sponsoring corporations, but in turn also has an exponential impact on the performance of such pension fund pools over long periods of time. Among the many benefits offered by the pooled structure are that it provides cost savings and efficiency gains through economies of scale at the level of investment management, administration and custody.

The directive coming into effect is one thing, building a true pan-European pensions market is quite another. There are many obstacles still to overcome

Whereas the traditional country-by-country pension scheme of a typical multinational group establishes one pension fund per country that then selects the appropriate investments, the pan-European pooled pension scheme collects contributions from the various local plans. These contributions are then pooled in, for example, a Luxembourg umbrella "fond commun de placement" ("FCP") or "société d'investissement à capital variable" ("SICAV"), which in turn invests in bonds, equities, money market instruments, investment funds, hedge funds, etc, with sub-funds of different risk profiles in order to provide for diverse investor risk appetites. If

Luxembourg is selected, then the pooled pension vehicle (PPV) in the form of an institutional fund is not subject to tax and in addition is also exempt from the "Taxe d'abonnement". Using the FCP structure would be the preferred route to achieving tax transparency in Luxembourg as it would allow pension schemes to benefit from double taxation treaties that are applicable to their country of domicile. A SICAV may be more appropriate for schemes seeking investments primarily in shares, ie where withholding tax deducted from investment income is less significant.

The European Stage

On 3 June 2003, the European Commission issued its EU directive 2003/41/EC on Institutions for Occupational Retirement Provision (IORP). The objective of the IORPs Directive is to open up the European pensions market and facilitate cross-border activities of pensions funds similar to what UCITS (Undertaking for Collective Investment in Transferable Securities) legislation aims to achieve for investment funds. It offers EU multinational corporations the opportunity to operate one single IORP for their European workforces. Of the 25 Member States, only about half managed to pass national legislation by the deadline of 23 September 2005 (Luxembourg being one of them), with 70-80% of Member States expected to have adapted their legislation by the end of the year.

The directive coming into effect is one thing, building a true pan-European pensions market is quite another. There are many obstacles still to overcome; for example, even though the legal foundations for cross-border pensions schemes have been laid with the EU directive, cross-border schemes will still need to comply with local labour and social security laws for each country in which they have members. One of the trickiest aspects however is taxation. The lack of harmonisation of pension taxation across Europe plus discriminatory fiscal provision penalising contributions and benefits in connection with foreign pension schemes pose a considerable challenge to the successful rollout of true pan-European pensions plans.

Luxembourg legislation and regulations

Luxembourg transposed the EU directive on IORPs into Luxembourg law through the laws of 13 July 2005, firstly, on the activities and supervision of institutions for occupational retirement provision [published in the Mémorial A 104 on July 21st], and secondly, on the form of pension savings companies with variable capital (SEPCAVs) and pension savings associations (ASSEPs) [published in the Mémorial A 108 on July 26th].

The commission de surveillance du secteur financier ("CSSF") issued in this respect Circular 05/201 (dated 29 July 2005) providing an outline of the main changes brought about by the law of 13 July 2005 (vis-à-vis previous legislation from 8 June 1999). The main changes are with respect to:

· Calculation of technical provisions and investment rules

· Cross-border provision of services (within the EU)

· Structure of the constitutive documents of the pension fund

· Role of the liability manager

· Designation of a depositary per sub-fund in Luxembourg or in another EU Member State

· Central Administration (must be located in Luxembourg)

· Investment strategies

· Transitional provisions (only two months until September 23rd to comply with the new law due to EU deadline)

At present, there are 9 ASSEPs and 4 SEPCAVs authorised by and under the supervision of the CSSF.

Benefits

The benefits of pan-European pension fund pooling may be summarised in four broad categories: i) economies of scale and cost reduction, ii) optimised reporting and oversight, iii) efficient asset allocation, and iv) investor protection and segregation of assets.

At present, there are 9 ASSEPs and 4 SEPCAVs authorised by and under the supervision of the CSSF

With respect to economies of scale and cost reduction, investors stand to gain from reduced transactions costs, reduced management fees, and income enhancement through securities lending. In additional small pension plans may gain access to sophisticated structures.

Regarding optimised reporting and oversight, efficiency gains relate to enhanced reporting from a single global custodian and central administrator, the application of the same accounting and valuation policies, and the outsourcing of administrative functions.

With regard to efficient asset allocation, the multinational company sponsoring the pool is able to monitor asset allocation and investment performance globally, execute global re-alignments of portfolios quickly and in a synchronised manner, and it gains access to multi-manager structures.

Finally, concerning investor protection and segregation of assets, investor benefits arise from regulatory oversight, independent reviews by external auditors, depository bank controls, and the fact that the assets are ring-fenced from those of the sponsor.

Challenges

The concept of pan-European pension fund pooling faces many challenges. The existence of discriminatory taxation of cross-border contributions to and payments of benefits from the fund is arguably the most difficult to resolve. On the reporting side, there are diverse regulatory and tax reporting requirements to cope with. As far as fund accounting is concerned, there are complexities regarding the use of varying pricing points, different NAV publication frequencies and different GAAP requirements applicable across participants - even though convergence to IFRS is on the horizon.

Conclusion

Pan-European pension fund pooling built upon the fundamentals of the European Union's IORPs directive represents an interesting alternative to the traditional model of individual corporate pension plans at country level. Economies of scale, efficiency and cost arguments clearly support the case. However, there are also some considerable obstacles, mainly on the tax side, that stand in the way.

Abbey National Case: how to interpret and apply the VAT exemption for investment funds?

On September 8, 2005, Julianne Kokott, the Advocate General of the ECJ gave her conclusions in the Abbey National case regarding the scope of the VAT exemption granted to " the management of special investment funds".

She started by pointing out that the concept of "management" was a Community concept which could not be defined by Member States. The latter can, however, define the beneficiary funds.

Then, Ms Kokott indicated that outsourced custody and administrative services could qualify for the exemption if "they form a distinct whole and are essential for and specific to the management of the fund". This would apply to a bundle of services that would form an essential part of all functions arising from the management of the fund. As a result, outsourced services that do not satisfy these conditions should be liable to VAT. In the Advocate General's opinion, "pure technical safekeeping" services could not benefit from the exemption.

If these "technical" services are the most characteristic component of the custodian role, VAT will have to apply to the custodian services in their entirety. It is then up to the national courts to determine whether this is the case.

Since the principles outlined here are not specific, applying and interpreting them could turn out to be difficult. Hopefully, the ECJ's decision, which should be issued later this year or early next year, will help clarify this key issue.

Laurent de La Mettrie & Michel Lambion -PwC Luxembourg

EU Savings Directive from an Irish Authorised Fund perspective

The EU Council Directive 2003/48/EC of 3 June 2003 (also known as the "savings directive"), deals with the taxation of savings income in the form of interest payments and seeks to ensure that individuals resident in an EU Member State who receive savings income from another EU Member State are taxed in the Member State in which they are resident for tax purposes. The Directive was transposed into Irish Law in Chapter 3A of Part 38 of the Taxes Consolidation Act 1997 (inserted by the Finance Act 2004). The implementation of the savings directive bears important implications for the fund sector.

There are three categories of investor in a fund under the savings directive:

· The beneficial owner, as defined under Article 2 of the directive, is the individual who ultimately gets the economic benefit from the investment in the fund and is usually the last in line in the payment chain

· The paying agent (Article 4 of the directive) is a person/entity whose business is to secure interest payments etc for forward payment to a beneficial owner. Nominee positions in a fund would be considered to be a Paying Agent.

· A residual entity, not defined under the directive but which can be identified by a process of elimination. If an entity is not a beneficial owner or a paying agent then it will be classified as a residual entity. A fund invested in another fund would not be a residual entity if the fund itself is a company or if it is a trust and the trustee to the fund is a company.

For Irish paying agents, the reporting obligations under the legislation will apply in respect of interest payments made to individuals resident either in other EU Member States or in certain dependent or associated territories of Member States with which arrangements have been made to implement measures similar to the savings directive rules. A "relevant territory" means either an EU Member State other than Ireland or a territory with which one of these arrangements is in place.

Under the new legislation there are three main requirements for paying Agents

1 Establish identity/residency of individuals: For investors in the Fund prior to 1 January 2004 documents on the anti money-laundering ("AML") file are to be used to determine the residency of an investor. Investors subscribing subsequent to 1 January 2004 should be requested to provide a Tax Identification Number (TIN). If an investor does not provide a TIN the residency should again be determined using the AML documentation on file and consideration should be given to the place of birth.

If an investor claims he/she is resident in a country other than that indicated by their AML documents or TIN a certificate of residency must be obtained from the revenue authority in the country in which the investor is claiming to reside. Where there is a joint investor in a fund then the residency of all investors must be established.

2 Retain documents used to establish identity: Documents used to establish the identity and residency of an investor must be maintained for 5 years after the last redemption in the fund has taken place, this is in line with the current Irish AML requirements.

3 Report to the Irish Revenue Commissioners details of payments made to individuals or residual entities. This will be dealt with below.

Current position

Transfer agents should have been obtaining TINs for all investors since 1 January 2004 and be able to identify those investors located in an EU country

On the other hand, fund administrators should review the funds they administer to confirm if a fund is "in scope" or "out of scope". If a fund is out of scope there is no reporting required irrespective of who the investors are, however if a fund is in scope then their level of reporting requirements will be dependent on the composition of the assets of the fund.

A more detailed list of interest-bearing securities can be obtained from the Irish Revenue Commissioners

According to Article 6 of the savings directive, a fund is in scope if more than 15% of the NAV is held in interest-bearing securities. Interest-bearing securities include but are not limited to the following (note a more detailed list of interest-bearing securities can be obtained from the Irish Revenue Commissioners):

· Interest received from an interest bearing account;

· Interest received from bonds; and

· Capitalised securities/amortised securities

It should be noted that any fund authorised outside the EU or relevant territories is considered to be in scope irrespective of the portfolio compilation.

Conversely, a fund is out of scope if less than 15% of the assets of the fund is held in interest-bearing securities. If a fund's prospectus prohibits the holding of interest-bearing securities then this can be considered out of scope.

The Irish Revenue has not set out the time of the year at which fund portfolios should be assessed for the percentage holding in interest bearing securities. Rather they stated that the timing should be logical and consistent year on year. One time suggested within the Dublin market is based on the audited year-end date of the fund.

The fund administrator should have policies and procedures in place to be able to calculate the taxable income per share/ unit if a fund is "in scope"

The fund administrator should have policies and procedures in place to be able to calculate the taxable income per share/unit if a fund is "in scope"

Required going forward

The first reports to the Irish Revenue Commissioners will be required to be made on 31 March 2006, who will then have until the 30 June 2006 to report to their EU colleagues.

A number of factors that have to be taken into consideration when determining the reporting requirements for a fund.

If the fund holds between 15% and 40% of the portfolio invested in interest-bearing securities then only details in relation to redemption amounts for beneficial owners and residual entities need to be reported to the Irish Revenue Commissioners.

If the fund holds more than 40% of the portfolio invested in interest bearing securities then redemptions and distributions amounts paid should be reported to the Irish Revenue Commissioners.

It should be noted that only one report is required to be made to the Irish Revenue Commissioners irrespective of the number of redemptions or distributions made during the calendar year.

In terms of nature of information to be provided, all paying agents (which all transfer agents will be) must report the following information about themselves:

· Name

· Address (registered office where a company is concerned)

· Tax reference number

For a beneficial owner receiving redemption payments and/or distributions as outlined above, the following information in addition to the relevant payments should be provided:

· Name Address

· Country of residence

· TIN number if available ie subscribed after 1 January 2004.

For a residual entity receiving redemption payments and/or distributions as outlined above the following information in addition to the relevant payments should be provided:

· The paying agent must report their own name, address and tax reference number

· The name and address of the residual entity

It should be noted that there is no need to report any distributions to, or redemptions by, Irish resident investors.

There is no need to report any distributions to, or redemptions by, Irish resident Investors

The legislation in place implementing the Savings Directive provides for the audit, by the Revenue Commissioners, of the procedures put in place by paying agents to comply with their obligations. Penalties for non-compliance are also provided for.

Conclusion

As defined in the Guidance Notes issued by the Irish Revenue Commissioners, all transfer agency departments should now have procedures in place to ensure that they are obtaining, recording and filing TINs for all new investors. Furthermore, all funds should be classified as "in scope" or "out of scope". All fund accounting departments should have a process detailed for selecting the relevant period to monitor the percentage holdings of the fund that are in interest-bearing securities.

A process should be under way to establish procedures, if not already in place, for the fund administrator to be able make the necessary filings with the Revenue by 30 March 2006. This may require the fund administrator registering on the Irish Revenue Commissioners website (Revenue on Line - "ROS") to enable them to make the return on line.

Contacts

Sean Quinn
European Head of Fiduciary Services
sean.quinn@citigroup.com
tel: +44 (0)20 7500 5619

David Morrison (London)Fiduciary Relationship Manager
david.m.morrison@citigroup.com
tel: +44 (0)20 7500 8021

Iain Lyall (London)Fiduciary Relationship Manager
ian.lyall@citigroup.com
tel: +44 (0)20 7500 8356

Francine Bailey (London)Fiduciary Relationship Manager
francine.bailey@citigroup.com
tel: +44 (0)20 7500 8580

Andrew Newson (London)Fiduciary Relationship Manager
andrew.c.newson@citigroup.com
tel: +44 (0)20 7500 8410

Bronwyn WrightEuropean Head of Fiduciary Relationships
bronwyn.wright@citigroup.com
tel: +353 1 622 2791

Nicola Byrne (Dublin)Fiduciary Relationship Manager
nicola.byrne@citigroup.com
tel: +353 1 622 1056

Shane Baily (Dublin)
Fiduciary Relationship Manager
shane.baily@citigroup.com
tel: +353 1 622 6297

Juergen EhleHead of German Fund Services
juergen.ehle@citigroup.com
tel: +49 (0)69 1366 1409

Francis Pedrini (Luxembourg)Fiduciary Relationship Manager
francis.pedrini@citigroup.com
tel: +352 45 1414 228

Daniel Mente (Luxembourg)Fiduciary Relationship Manager
daniel.mente@citigroup.com
tel: +352 45 1414 492

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