Earlier in August, the European Commission confirmed that UCITS and AIFM rules will no longer apply to the UK following the conclusion of the transitionary period in December.
Passporting rights have dominated the regulatory discussion. While UK firms will no longer be able to operate UCITS funds across the EU, they will be treated as third-party AIFS, with some member states likely to allow UK firms to market AIFs based on national private placement regimes.
The UK, for its part, is set to generously grant EU-domiciled passporting rights at the end of 2020, even as UK funds enjoy no equivalency in return. That brings some much-needed certainty to a long and drawn out process, at least.
But for European UCITS funds, there are some other changes they will need to take heed of – particularly as the UK becomes a third-country for regulatory purposes come Brexit.
First of all, the depository of EU AIFs and UCITS must be located in the home Member State of the fund, and can no longer be located in the UK. If an EU company has chosen the UK as its depositary source then there needs to be a demonstration as to why this was chosen.
Second, with the UK considered a third-country for counterparty purposes, EU UCITS funds may also have to limit their UK counterparties too, especially if a single UK counterparty goes over the 5% of NAV threshold (it was previously 10% as an EU member). The same goes for total deposits with that counterparty, with the threshold now falling from 20% to 10% in the given UK counterparty.
And finally for bond funds, the issuer rule now means that funds can only hold 80% of bonds from one EU country, while one security can’t surpass 5% of the total fund’s holdings. The 80% rule will therefore not apply to UK issued bonds.
Most importantly, UCITS firms must ensure that they have correctly designated the UK as a third country in their security master data to ensure they do not unwittingly break any of the threshold rules that will now apply given the change in the UK’s status.
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