Undertakings for Collective Investment in Transferable Securities (UCITS) V


Background to UCITS V

The original UCITS Directive created the internal market for investment funds in Europe. The current EU legislation for investment funds (the UCITS Directive) has been the basis for an integrated market facilitating the cross-border offer of collective investment funds. UCITS have proved successful and are widely used by European retail investors. UCITS are also regularly sold to investors outside the EU where they are valued due to their high level of investor protection.

The European Commission's (EC) proposed amendments to the original UCITS rules (UCITS V) are designed to continue to ensure the safety of investors and the integrity of the market. In particular, the proposal will aim to ensure that the UCITS brand remains trustworthy by ensuring that the depositary's (the asset-keeping entity) duties and liability are clear and uniform across the EU.

On 25 February 2014, the European Parliament and Council backed the European Commission’s proposal to strengthen the rules for UCITS. On 23 July 2014, the EU formally adopted the Directive, which was then published in the Official Journal on 28 August and subsequently came into force on 17 September 2014.

What are the aims of the UCITS V Directive?

  • To create uniform regulatory conditions across the EU
  • To harmonise the rules regarding depositary duties, eligibility and liabilities across EU member states
  • To align the UCITS legal framework with the Alternative Investment Fund Managers Directive’s (AIFMD) procedures regarding depositary, remuneration and sanctions now in force for non-UCITS funds

Key elements of the 25 Feb 2014 UCITS V agreement:

  1. UCITS V strengthens the rules on eligible entities that can act as a depositary. Only national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure will be eligible as UCITS depositaries and will hold for safe-keeping all UCITS assets.
  2. UCITS assets will be protected in the event of insolvency of the depositary through clear segregation rules and safeguards.
  3. The depositary's liability has been strengthened, in particular regarding a loss of UCITS assets held in custody. UCITS investors will have the right of redress directly against the depositary and will not have to rely on the management company's ability to accomplish this task.
  4. Remuneration policies: key risk takers involved in managing UCITS funds must adopt and abide by remuneration practices that do not encourage excessive or short term risk-taking. Similarly, those with key internal control responsibilities must adopt and abide by remuneration practices aligned to sound and effective risk management. The transparency of the remuneration practices will be enhanced. The remuneration policies are similar to those in the AIFMD.
  5. The agreement strengthens the existing regime to ensure effective and harmonised administrative sanctions. The use of criminal sanctions is framed so as to ensure the cooperation between authorities and the transparency of sanctions. A harmonised system of strengthened cooperation will improve the effective detection of breaches of UCITS rules.


UCITS V was published in the EC’s Official Journal on 28 August 2014 and came into force on 17 September. The EC has stated that member states will have until 18 March 2016 to transpose these provisions into national law.

For more information on UCITS V, please refer to the EU’s FAQs.

Last updated: 24 March 2015

UCITS share classes

ESMA opinion on UCITS share classes

On the 30th January 2017 the European Securities and Markets Authority (“ESMA”) published an opinion paper (“the opinion”) on the use of UCITS share classes that was addressed to National Competent Authorities (“NCAs”).

The UCITS directive recognises the possibility for UCITS to offer different share classes to investors, but it does not prescribe whether, and to what extent, share classes of a given UCITS can differ from one another. There is therefore as yet no common legal or regulatory framework for share classes throughout the EU. In some jurisdictions share classes cannot be set up at all; in others they are allowed, but the degree of flexibility varies, both in regard to their features and whether they need to be pre-approved by the NCAs.

The aim of the opinion is to initiate a harmonised approach throughout the EU for the treatment of share classes through the adoption of a common set of principles.

A copy of the opinion can be found here.

ESMA high level principles approach

In the opinion, ESMA outlines four high-level principles which UCITS must follow when setting up different share classes with a view to define the concept of “UCITS share class” and set boundaries between share class and compartment.

Common investment objective

Share classes of the same fund should have a common investment objective reflected by a common pool of assets. ESMA considers that hedging arrangements at share class level – with the exception of currency risk hedging – are not compatible with the requirement for a fund to have a common investment objective. Also there is some concern that the use of derivative overlays within a share class could lead to that class having a risk profile, and therefore an investment objective, which would no longer be in line with the overall investment objective of the fund.

Thus, ESMA states that UCITS which aim to protect investors from certain types of risk though the use of derivative overlays, should set up separate sub-funds rather than separate share classes (with the exception of currency risk hedging).


ESMA states that UCITS management companies should implement appropriate procedures to minimise the risk that features specific to one share class (such additional risk introduced to a fund as result of the use of a share class currency hedge) could have a potentially adverse impact on other share classes of the same fund - referred to in the opinion as non-contagion risk or spill-over risk.

In order to ensure that derivative use within share classes does not lead to contagion risk, ESMA proposes minimum operational procedures with exposure limits for the mitigation and monitoring of risks associated with share class hedging (although it recognises that such risks cannot be fully eliminated).

A summary of these operational principles are:

  • The notional of the derivative overlay should not lead to a payment or delivery obligation with a value exceeding that of the share class;
  • Accounting segregation should be operationally in place to allocate the hedging contracts and their profit and loss, both realised and unrealised, to the Net Asset Value (“NAV”) of each Share Class;
  • The UCITS management company should implement stress tests to quantify the impact of losses on all investor classes of a fund that are due to losses relating to share class-specific assets that exceed the value of the respective share class;

ESMA is aware that daily subscriptions and redemptions lead to conditions where it is difficult to attain a perfect hedge within a fund or share class. To nonetheless ensure that the above operational principles are met, the UCITS management company should, at the level of the share class with a derivative overlay:

  • Ensure that the exposure to any counterparty is line with the limits laid down in the UCITS Directive
  • Monitor that hedging positions are at all times within 95% of the net asset value of the share class which is to be hedged against currency risk and 105% of the net asset value of the share class; and
  • Hedging positions should be reviewed on an ongoing basis (at least at the same valuation frequency as the fund) to ensure that positions stay within the permitted levels outlined above.


ESMA considers that all features of the share class should be pre-determined before the fund is set up. This is to enable investors to obtain a full overview of the rights and/or features attributed to their investment. This should also apply to any currency risk which is being hedged out.


Further, ESMA introduces a number of minimum transparency requirements. These are:

  • Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
  • UCITS management companies should provide a current, readily available and consultable list of share classes with a contagion risk, which should be kept up to date
  • Upon the request of NCAs, UCITS management companies must provide stress test results.


In addition to the above principles, ESMA is of the view that share classes should never be set up to circumvent the rules of the UCITS Directive, particularly those on diversification, derivative eligibility and liquidity.

The ESMA opinion is not legally binding but was addressed to National Competent Authorities (“NCAs”) and as such it is expected that each NCA will review and adopt the principles in full and incorporate them into local UCITS regulations.

The Commission de Surveillance du Secteur Financier (“CSSF”) has published a press release confirming that it expects all Luxembourg UCITS to comply with the ESMA common principles and to take the necessary measures to comply with the transitional provisions set forth in the ESMA opinion.

A copy of the press release can be found here.

Transitional provisions and impacts on existing share classes

ESMA is aware that the principles outlined in its opinion will have a considerable impact on the investment fund markets in Member States where share class arrangements can currently be set up which do not comply with these principles.

In order to mitigate the impact to investors in existing share classes which do not comply with the opinion, ESMA states that those share classes may continue to operate for now however it goes on to say that share classes which do not adopt the principles should be closed by the following dates:

  • For investment from new investors by 30 July 2017
  • To all additional investment by existing investors by 30 July 2018

How can HSBC support you?

HSBC Securities Services as a Fund Administrator

HSBC Securities Services has the capability to account for currency risk hedging in accordance with the ESMA opinion. Any share class specific foreign exchange transactions entered into to manage currency risk are included in the books and records at the share class level. Any profit or loss and any costs of these transactions are accounted for within that class and do not impact on any other class of the fund.

HSBC Securities Services as a collateral management service provider

Collateral management services can support collateral monitoring at the share class level and will continue to provide detailed reports capturing fund level collateral activity.

HSBC Securities Services as a transfer agent

Following instructions received from the portfolio manager HSBC Securities Services transfer agency department have the capability to block transactions from new and existing investors in the event of share-class non-conformance to the principles.

HSBC Global Markets as an executing party to the trade

Following the publication of the ESMA opinion, HSBC Global Markets are considering the offerings that we can provide to assist our clients in meeting their obligations.

The existing FX Overlay product already offers solutions that would cater for the majority of the requirements under the non contagion principle, and we are therefore focussing discussions on the following:

  • An extension of the existing FX Overlay product to contribute the stress testing requirements
  • Solutions for transformation of assets into funding for variation margin.

For further information regarding HSBC currency risk management solutions please visit the below website:

Should you wish to discuss the potential target operating model changes as a result of the share class opinion please contact your dedicated client service representative.

Last updated: 19 April 2017