Tuesday May 17 2022
News Source: Fund Regulation
Focus: Liquidity Risk Management
On 16 May, the Central Bank of Ireland published the Approval Process for UCITS Side-pocketing arrangement in relation to Russian, Belarusian and Ukrainian assets that are impacted by the Russian invasion into Ukraine and/or impacted by sanctions that have been imposed as a result of Russia’s invasion of Ukraine.
The Central Bank will permit, subject to conditions, a UCITS to implement a sidepocket arrangement only for Russian, Belarusian and Ukrainian assets that are directly and/or indirectly impacted by the Russian invasion into Ukraine and/or impacted by sanctions that have been imposed as a result of Russia’s invasion of Ukraine. The Affected Securities have become illiquid or untradeable as a result of the Russian invasion of Ukraine and at this time, are difficult to value accurately. This arrangement may be implemented by way of establishment of a clone fund into which liquid assets may be transferred. The side pocketing of UCITS assets is only available in the context of Affected Securities and should not be interpreted as creating a precedent by the Central Bank for any other current or future situations.
A side-pocket by way of a new UCITS is established when liquid assets of an (original) UCITS are transferred into a newly authorised/approved clone UCITS. The Affected Securities which have become illiquid or difficult to value remain in the original UCITS. Shareholders in the newly established clone UCITS hold shares in that fund pro-rata to their holdings in the original UCITS. Investors in the original UCITS continue to have a pro-rata holding in the original UCITS. The original UCITS would be wound down over time with any realised value being paid out to shareholders.
An original UCITS may establish a side-pocket by way of a newly established clone UCITS provided that:
- The proposal is in the best interests of unitholders.
- Investors have approved transfer into the newly established clone UCITS side-pocket.
- The UCITS has obtained prior written approval of the Central Bank for the proposal.
- The UCITS provides a clear description to unitholders of the costs and fees associated with establishing the side-pocket. The UCITS must also provide details of the ongoing costs and fees payable in its prospectus.
- The original UCITS is placed in wind-down mode at the same time as the creation of the new clone UCITS.
- The original UCITS has established written policies in relation to management of the Affected Securities, including polices relating to the costs and fees associated with maintenance of the original UCITS.
- The original UCITS reports to the Central Bank on an annual basis confirming whether or not the parameters and policies continue to be respected and outlining the prospects and/or plans for the side-pocketed assets and liquidation of the original UCITS.
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