The previous update to the guidance in October 2018 introduced a self-certification obligation in respect of financial indices used by a UCITS, with a pre-approval submission to the Central Bank required for certain types of indices.

Under this regime, the UCITS was required to assess each financial index that it intended to use to ensure that it complied with all relevant regulatory requirements. Once this determination had been made, a responsible person (a director of the UCITS Management Company/SMIC) was required to certify to the Central Bank that the relevant regulatory requirements were met when the UCITS sought authorisation from the Central Bank. Where a previously authorised UCITS /sub-fund proposed to use a financial index, the certification was required to be provided by way of a post-authorisation submission.

On 23 July, the Central Bank issued updated guidance (“Guidance”) amending this certification process and clarifying when an index certification is not required to be submitted. The Guidance provides that an index certification is not required where:

• the index is used for tracking or replication, investment or efficient portfolio management purposes and on a look-through basis the UCITS could invest directly in the constituents of the index/indices as permitted under the UCITS Regulations (for example, the “5/10/40” rule);
• market movements or other events may cause the weightings of a financial index to change so that it no longer complies with the “5/10/40” rule. Where this happens and on the basis that the UCITS confirms as part of its authorisation/post-authorisation process that the index meets the regulatory requirements (i.e. it is comprised of eligible assets and complies with the “5/10/40” rule), the financial index will be deemed to meet index criteria set out in the Guidance; or
• an index is used solely as a performance benchmark.

A UCITS that proposes to use a financial index for which there is no requirement to submit an index certification should state, when making the application for authorisation to the Central Bank, that such index meets the regulatory requirements. The absence of such a statement will result in the Central Bank querying the use of the index, and requesting the relevant certification, thus delaying the authorisation process. The Guidance is silent about what approach should be taken by existing UCITS that do not have the ability to make this statement through the authorisation process and it is hoped this will be clarified in further guidance from the Central Bank.

The revised Guidance is partly in response to industry feedback. It should reduce the volume of self-certifications that need to be submitted to the Central Bank for UCITS to allow the use of indices that are sufficiently diversified and reference UCITS-eligible assets. It does not remove the need to submit a self-certification where the index does not meet the diversification requirements or references UCITS-ineligible assets (e.g., commodities indices).

It is important to remember that UCITS must still assess any proposed indices prior to use to determine whether they meet the relevant regulatory criteria. These assessments should be appropriately documented and retained, as the Central Bank may carry out spot checks on a UCITS’ compliance with the requirements. Where the Central Bank selects an index for assessment all relevant information must be provided immediately upon request.

If you would like to discuss the foregoing, or require any assistance assessing your requirements, please feel free to contact a member of our team.