Ucits VI 0912

UCITS VI Consultation Paper

Citibank International Plc, Ireland Branch

August 2012

Table of Contents

1. UCITS VI Consultation Paper 1

2. UCITS Evolution UCITS to UCITS VI 2

3. 1. Eligible Assets 3

4. 2. Efficient Portfolio Management 4

5. 3. OTC Derivatives 5

6. 4. Extraordinary Liquidity Management Tools 6

7. 5. Depositary Passport 7

8. 6. Money Market Funds (MMFs) 8

9. 6.1 MMFs - Valuation & Capital 9

10. 6.2 MMFs Liquidity & Redemptions 10

11. 6.3 MMFs Investment Criteria & Rating 11

12. 7. Long-term Investments 12

13. 8. UCITS IV Improvements 13

UCITS VI Consultation Paper

y Closing date of the consultation is 18 October 2012y Responses will be published in the following section of the European Commissions website:

http://ec.europa.eu/internal_market/consultations/2012/ucits/index_en.htm

y Areas covered can be summarised as follows: Product rules Liquidity Management Depositary Money market funds Long-term investments UCITS IV tweaking

The European Commission published a consultation paper on 26 July 2012 covering 8 topics for discussion with the aim of keeping the UCITS framework topical & in line with the evolution of the investment markets

UCITS Evolution UCITS to UCITS VIStudy the past if you would define the future. Confucius

1988/89 2003 2011 To be implemented

UCITS UCITS III UCITS IV UCITS V UCITS VIEU Product Passport Definition of transferable

securitiesNew notification procedure Depositary role Eligible assets

Risk-Spreading Rules Derivatives allowed for investment purposes

Intro of Key Investor Information Document (KIID)

Depositary delegation Efficient portfolio management (EPM) techniques

Legislative Uniformity Intro of the simplified prospectus

Adapted Framework for Mergers

Depositary liability OTC derivatives

Derivatives for hedging purposes only

Intro of new corporate governance practices

Master-feeder Structures Depositary eligibility Liquidity management rules

New inter-regulatorcooperation arrangements

Remuneration principles & policies

Depositary passport

Management Company Passport

Sanctions Money market funds

Updated derivative investment restrictions

Long-term investments

Addressing UCITS IV

From UCITS to UCITS VI

1. Eligible Assets

Review of asset scope & exposures Alignment of actual investment strategies with expectations for a UCITS product Additional development of asset liquidity rules Refinement of rules on exposure to non-eligible assets Distinguishing or limiting scope of eligible derivatives based on payoff Appropriateness of VaR as a measure of global exposure Derivatives limited to those traded on multilateral platforms only

Emergence of complex UCITS

Impact of G20 initiatives MiFID II and EMIR

Evaluation of current practices in UCITS portfolio management & assessment of certain fund investment policies

Drivers Areas Under Review

2. Efficient Portfolio Management

Issues & risks related to the current use of EPM techniques Current market practice regarding use of EPM Limits attributable to assets that may be subject to EPM Current market practice regarding collateral received in EPM Criteria for collateral re-use, eligibility, liquidity & diversification Mandatory haircuts on collateral received in EPM EPM liquidity considerations Economic substance of EPM transactions Market practice & new criteria regarding provision of collateral in EPM Additional transparency to investors regarding EPM techniques, collateral received &

earnings achieved/distributed

EPM transparency

Counterparty risk

Collateral quality

Collateral reinvestment

Shadow banking

Assessment of current rules regarding certain types of transactions and management of collateral


3. OTC Derivatives

Clarification of treatment of centrally cleared OTC derivatives Consistency of collateral for uncleared OTC derivatives & EPM transactions Risks resulting from contracting with a single counterparty Frequency of calculation of counterparty risk, issuer conc. & UCITS assets Introduction of a requirement to calculate counterparty risk/issuer conc. at least daily

EMIR

Exposure to a single counterparty

Frequency of counterparty exposure calcsvs.Frequency of UCITS portfolio vals.

Treatment of OTC derivatives cleared through central counterparties, assessment of operational risk & conflict of interest framework and frequency of calculation of counterparty risk exposure


4. Extraordinary Liquidity Management Tools

Internal liquidity constraint policies Framework for dealing with liquidity bottlenecks Definition of exceptional cases for redemption suspensions Redemption suspension time-limits Deferred redemption quantitative thresholds and time limits Options for side-pockets Liquidity safeguards in ETF secondary markets Rules for execution of redemption orders in normal circumstances

UCITS redemption process

Redemption suspensions

Deferred redemptions

Side-pockets

ETF 2ndary markets

Assessment of the potential need for uniform guidance in dealing with liquidity issues


5. Depositary Passport

Advantages & drawbacks of a passport from various perspectives Issues with current requirements vs possible issues of a fund-depositary separation Areas requiring additional harmonisation following the intro of the passport Fully-fledged authorisation regime vs reliance on other EU frameworks Specific issues around supervision of a depositary in a different jurisdiction

UCITS V

Assessment on the introduction of a cross-border passport for the performance of depositary functions


6. Money Market Funds (MMFs)

The role of MMFs in liquidity management and possible alternatives Target investors and asset composition of MMFs Extent of repo trading and sec-lending by MMFs MMF collateral management strategies Potential for systemic risk of MMFs Need for more harmonised & detailed regulation of MMFs at EU level MMF categorisation by asset type and maturity

Systemic importance of MMFs

Shadow banking

Assessment of potential need to strengthen the resilience of the MMF market in order to prevent investor runs & systematic risk


6.1 MMFs - Valuation & Capital

Additional regulation for CNAV MMFs, their activities reduced or phased out Introduction of capital buffers on CNAV MMFs and appropriate size/types of buffer Valuation methodologies other than mark-to-market in stressed market conditions

Constant NAV MMFs (CNAV MMFs)

vs.

Variable NAV MMFs (VNAV MMFs)



6.2 MMFs Liquidity & Redemptions

Possibility for liquidity bottlenecks in current UCITS framework Viability of the introduction of a liquidity fee Viability of the introduction of redemption restrictions Liquidity constraint mechanisms Limits for weighted average maturity & weighted average life

Immediate redemptions vs.Asset maturity

Liquidity fees & constraints

Redemption restrictions



6.3 MMFs Investment Criteria & Rating

Revision of the definition of MMF in the UCITS directive Banning the rating of MMFs Prohibition of investment criteria related to credit ratings Criteria needed for assessment of high quality assets

Overreliance on the opinions of credit rating agencies



7. Long-term Investments

Current options and appetite of retail investors and fund managers Common framework for long-term investments Eligible asset types and characteristics Secondary market and liquidity constraints Diversification rules and portfolio weightings Use of leverage & derivatives Minimum lock-up periods Use of UCITS framework to ensure high investor protection Possibility for UCITS to invest in units of European Social Entrepreneurship Funds

Low level of liquidity

Socially responsible investments

Financing of infrastructure projects

Reduce capital mktpressure

Assessment of potential need for measures to promote long term investments & of the possible form of such measures


8. UCITS IV Improvements

Delegated acts specifying administrative procedures & internal control mechanisms for investment companies

Additional master-feeder scenario conversion of feeder into ordinary UCITS Revision of the timelines for the mergers of UCITS Notification procedure

o Update notifications to move from written to electronic formo Clarification of share class info providedo Regulator-regulator notification for any changes to notification file

Alignment with the provisions of AIFMD

Deficiencies identified in the existing UCITS IV framework

Assessment of possible improvements to the rules concerning the manco passport, master-feeder structures, fund mergers & notification procedures


Questions & Answers

For more information:

Ian McCarthy

Senior Fiduciary Monitoring Officer

[email protected]

efficiency, renewable energy & mitigation

In January 2007, Citi released a Climate Change Position Statement, the first US financial institution to do so. As a sustainability leader in the financial sector, Citi has taken concrete steps to address this importantissue of climate change by: (a) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of alternative energy, clean technology, and other carbon-emission reduction activities; (b) committing to reduce GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (c) purchasing more than 52,000 MWh of green (carbon neutral) powerfor our operations in 2006; (d) creating Sustainable Development Investments (SDI) that makes private equity investments in renewable energy and clean technologies; (e) providing lending and investing services toclients for renewable energy development and projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging witha broad range of stakeholders on the issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

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UCITS VI Consultation PaperTable of ContentsUCITS VI Consultation PaperUCITS Evolution UCITS to UCITS VI1. Eligible Assets2. Efficient Portfolio Management3. OTC Derivatives4. Extraordinary Liquidity Management Tools5. Depositary Passport6. Money Market Funds (MMFs)6.1 MMFs - Valuation & Capital6.2 MMFs Liquidity & Redemptions6.3 MMFs Investment Criteria & Rating7. Long-term Investments8. UCITS IV ImprovementsQuestions & AnswersSlide Number 17

Ucits VI 0912

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