Opinion of the European Central Bank of 16 March 1999 at the request of the Council of the European Union under Articles 109l(2) and 109f(6) of the Treaty establishing the European Community and Article 5.3 of the Statute of the European Monetary Institute on two European Commission proposals for European Parliament and Council Directives amending Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), ref. 98/0242 - COM(1998) 451 final and ref. 98/0243 - COM(1998) 449 final (CON/98/54)
Date: 1999-03-16
Institutions: European Central Bank
Subjects: EU Member State, approximation of laws, business management, investment company, securities

7.10.1999

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Official Journal of the European Communities

C 285/9

OPINION OF THE EUROPEAN CENTRAL BANK

of 16 March 1999

at the request of the Council of the European Union under Articles 109l(2) and 109f(6) of the
Treaty establishing the European Community and Article 5.3 of the Statute of the European
Monetary Institute on two European Commission proposals for European Parliament and
Council Directives amending Directive 85/611/EEC on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective investment
in transferable
securities (UCITS), ref. 98/0242 (cid:151) COM(1998) 451 final and ref. 98/0243 (cid:151) COM(1998) 449 final

(CON/98/54)

(1999/C 285/08)

1. The European Central Bank (hereinafter referred to as the
(cid:145)ECB(cid:146)) received requests from the Council of the European
Union (hereinafter referred to as the (cid:145)Council(cid:146)), dated 16 and
26 October 1998, for an ECB opinion on draft legislative
proposals for European Parliament and Council Directives
(hereinafter referred to as the (cid:145)draft Directives(cid:146)) amending
Directive 85/611/EEC on the coordination of
laws, regu-
lations and administrative provisions relating to under-
takings for collective investment in transferable securities
(UCITS) (hereinafter referred to as the (cid:145)UCITS Directive(cid:146)).

new version of the UCITS Directive would be preferable.
This is all the more the case since the UCITS Directive
appears to have been interpreted differently by Member
States. Such different interpretations are undesirable in the
context of a single money and financial market and may
lead to competitive distortions and misallocation of funds.
Alternatively, consideration could be given to the possibility
of including a new recital (introduced by (cid:145)whereas(cid:146)) in both
draft Directives stating that all Member States should make
every effort to implement both Directives simultaneously in
their national legislation.

2. In accordance with Article 109l(2) of the Treaty establishing
the European Community (hereinafter referred to as the
(cid:145)Treaty(cid:146)), the ECB has taken over the advisory functions of
the European Monetary Institute (EMI), which went into
liquidation upon the establishment of the ECB on 1 June
1998. The requests from the Council were based on Articles
109l(2) and 109f(6) of the Treaty. The ECB’s competence to
deliver an opinion is now based on Article 105(4) of the
the European
Treaty and Article 4(a) of
System of Central Banks and of
the European Central
Bank, both of which entered into force on 1 January
1999.
first sentence, of
the Rules of Procedure of the ECB, this ECB opinion has
been adopted by the Governing Council of the ECB.

In accordance with Article 17.5,

the Statute of

4. The ECB notes that

in part,

the draft Directives present a new
in an earlier
solution to issues dealt with,
proposal
for a Directive amending the UCITS Directive
(COM(93) 37 final, modified by COM(94) 329 final) on
which the EMI delivered an opinion on 27 July 1995
(CON/94/8). The ECB notes that, to a certain extent, the
draft Directives raise issues similar to those contained in
the earlier proposal. Consideration may therefore also be
given to the advisability of taking account of the previous
opinion of the EMI in the context of the discussion on the
draft Directives.

the

first

(COM(1998) 449 final)

3. The ECB has decided to deliver one opinion dealing with
both consultations as the two draft Directives both aim at
amending Directive 85/611/ECC. The ECB understands that
the Commission of the European Communities has prepared
a package of measures distributed through separate
proposals:
focuses
essentially on the types of investment funds, whereas the
second (COM(1998) 451 final)
focuses essentially on the
service provider (the management company) and on the
In the explanatory
prospectus requirements for UCITS.
memoranda to both draft Directives,
it
is stated that
it
will be of no consequence if one of the two Directives is
adopted more rapidly than the other. However, given the
fact that amendments to one draft Directive may have an
impact on the other and the fact that the draft Directives
propose substantial modifications to the UCITS Directive,
the ECB believes that, for the sake of clarity, transparency
and legal certainty, discussion of a complete and integral

5. The

any

that

amendment

ECB notes

to Directive
85/611/EEC might have an impact on the legal definition
of money market funds for statistical purposes, as defined
by the ECB itself in Annex 1, Part I, Section I, paragraphs 5
and 6 of the ECB Regulation concerning the consolidated
balance sheet of the Monetary Financial Institutions sector
(ECB/1998/16), as adopted by the Governing Council of the
ECB on 1 December 1998 (OJ L 356, 30 December 1998,
p. 7). Therefore, the draft Directives have been assessed in
particular with regard to their consistency with the ECB’s
legal definition of money market funds.

I. COM(1998) 449 final

1. One objective of this draft Directive is to remove barriers
to the cross-border marketing of units of collective
investment undertakings through (a) the extension of the
freedom to be marketed throughout the European Union

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to collective investment undertakings investing in financial
assets other than transferable securities, such as units of
other collective investment undertakings, money market
instruments, bank deposits,
standardised options and
futures contracts,
(b) the revision of some provisions in
order to update the UCITS Directive in the light of new
portfolio management
techniques which have been
developed since 1985 and (c) the removal of uncertainties
relating to the interpretation of a number of provisions
contained in the UCITS Directive which impede uniform
application of the Directive.

collective

investment undertakings

2. The ECB takes note of the objectives of the draft Directive,
in particular the extension of the definition of UCITS to
those
investing in
financial assets other than transferable securities, such as
units of other collective investment undertakings, money
instruments, bank deposits, standardised options
market
the
and futures contracts, because the definition of
existing UCITS Directive does not cover all money
market
in bank
deposits in some countries.
In addition, definitions of
transferable securities and money market instruments are
provided in the draft Directive, both of which are broadly
in line with the definition used by the ECB for statistical
purposes.

some of which also invest

funds,

3. The ECB notes that Article 1(7) of

the

respective provisions. The

the draft Directive
proposes a new Article 22(a) of the UCITS Directive facili-
tating the establishment of UCITS, the investment policy of
which is to (cid:145)replicate(cid:146) a specified stock index. The Council
may wish to consider whether it may be preferable to refer
to UCITS, the investment policy of which is to (cid:145)track(cid:146) a
specified stock index. In this case the kind of (cid:145)tracking(cid:146)
would have to be specified in order to ensure uniform
application of
ECB
recognises that there is an interest in the establishment
of such types of UCITS. Nevertheless, the ECB recommends
that the provision of Article 22(a)(2) (definition of replicate
stock indices) be spelt out in greater detail so as to ensure
that no distortions arise as a result of certain existing
indices not being on the list published by the European
Commission, recognising however the technical difficulties
of establishing more detailed notions.
In particular, the
(cid:145)having a composition which is sufficiently
notions of
diversified(cid:146),
(cid:145)being easy to replicate(cid:146) and (cid:145)representing an
adequate benchmark for the equity market to which they
refer(cid:146) are not sufficiently clear, which may result in unwar-
ranted market distortions,
if certain indices were to be
unduly promoted more than other indices. Furthermore,
consideration might be given to whether the limit of
35 % in Article 22(a)(1)
is too high. The investment of
up to 35 % of the assets of a fund in instruments of one
issuer can hardly be reconciled with the principle of risk-
spreading laid down in Article 1(2) of the existing UCITS
Directive which shall apply to all UCITS.

In this respect,

the same group.

the current proposal

4. The ECB notes that the scope of the definition of UCITS
(Article 1(1) of the draft Directive, amending Article 1,
paragraph 2, first indent of the UCITS Directive) has also
been extended to cover money market
funds and is
consistent with the ECB’s
legal definition of money
market funds. The ECB notes in particular that Article
1(3) of
the draft Directive (proposed new Article 19,
paragraph 1(f) of the UCITS Directive) provides for the
possibility of investing in (cid:145)deposits with credit institutions(cid:146).
In this context, the ECB notes that Article 1(9) of the draft
Directive allows for investments of up to a maximum of
35 % of the UCITS assets in deposits with credit insti-
tutions of
the ECB
to draw attention to the EMI opinion
should like
in the draft
(CON/94/8). Under
Directive, an investor could lose up to 35 % of his/her
investment through the failure of a single credit institution.
The considerations concerning appropriate warnings to
investors also apply in the context of this proposal (see
below). In this respect, the Council may wish to consider
lowering the maximum limit for investment of the UCITS
assets in deposits with credit
the same
group. In this context it also seems questionable whether
the assets of a fund in
the investment of up 35 % of
instruments of one issuer can be reconciled with the
principle of risk-spreading laid down in Article 1(2) of
the existing UCITS Directive which shall apply to all
UCITS. Moreover, when defining the relevant limits the
Council may wish to take into account the fact that a
fund may incur exposure to the same credit institution
also in relation to instruments and contracts other than
(cid:145)deposits(cid:146) (e.g. debt securities, equities or OTC derivative
contracts).

institutions of

5. The ECB welcomes the fact that the definition of trans-
ferable securities, as determined by Article 1(2) of
the
draft Directive (proposed new Article 1, paragraph 8(a)
is cosistent with the definition
of the UCITS Directive),
of negotiable instruments used by the ECB for statistical
purposes.

6. The ECB notes

that

the UCITS Directive)

the definition of money market
instruments, which is provided in Article 1(2) of
the
draft Directive (proposed new Article 1 paragraph 8(b) of
the UCITS Directive) and further specified in Article 1(3) of
the draft Directive (proposed new Article 19, paragraph
is broader in scope than
1(i), of
that contained in the ECB’s legal definition of money
market funds but is consistent with the ECB’s definition
in general terms. The latter is more specific in defining
to be
the
considered as a money market
such as
liquidity, depth of
the money market and certainty in
value and low interest rate risk. The ECB notes that this
could result in a financial instrument representing a money
market instrument according to Community law failing to

requirements

instrument,

instrument

financial

for

a

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fulfil all criteria as determined in the ECB’s legal definition
of money market
funds. This becomes obvious on
considering the ECB’s legal definition of money market
funds contained in Annex 1, Part I, Section I, paragraph
6(iv) to the ECB Regulation concerning the consolidated
balance sheet of the Monetary Financial Institutions sector
(ECB/1998/16), which defines low interest rate risk (cid:145)in the
meaning of having a residual maturity of up to and including
one year, or regular yield adjustments in line with money market
least every twelve months(cid:146). As the definition
conditions at
given in the draft Directive is broader than the ECB’s defi-
nition and as the draft Directive is not aimed at defining
categories of UCITS, the two definitions do not seem to be
in contradiction. Nevertheless,
that a
the definitions would promote trans-
harmonisation of
parency.

the ECB notes

7. In addition,

the ECB considers that

the possibility for
UCITS, as laid down in Article 1(3) of the draft Directive
(proposed new Article 19, paragraph 1(f) of the UCITS
Directive) of also investing in (cid:145)deposits with credit insti-
is consistent with the ECB’s legal definition of
tutions(cid:146)
money market
determines more
precisely the kind of bank deposits in which a money
market
in order to be considered as
such. However, as no distinction is made in Community
law between different categories of collective investment
institutions, this does not give rise to any inconsistencies.
Nevertheless, the ECB notes that a harmonisation of the
definitions could be considered.

fund may invest

funds. The

latter

funds,

ECB suggests

8. Given the fact that amendments to the UCITS Directive
might have an impact on the ECB’s legal definition of
money market
the
the
relationship between the UCITS Directive and the ECB’s
legal definition of money market
should be
clarified in a recital (introduced by (cid:145)whereas(cid:146)) in the draft
Directive by referring to the competence of the ECB to
define money market funds within the framework of the
ECB Regulation concerning the consolidated balance sheet
of the Monetary Financial Institutions sector.

funds

that

risk-spreading.

9. The ECB believes that careful consideration should be
safeguarding the transparency and
given to measures
the ECB holds the
In this respect,
stability of UCITS.
view that careful consideration should be given to the
appropriateness, desirability and feasibility of measures
safeguarding the principle of
In this
context, the Council may wish to consider whether it is
advisable, in respect of the calculation of thresholds for the
investment in transferable securities and/or instruments of
a single issuer, for (cid:145)connected(cid:146) issuers to be regarded as a
single risk as a matter of principle. The draft Directive
introduces this principle in relation to investments in
deposits with credit institutions (Article 1(9) of the draft
Directive,
introducing a new Article 24(a) of the UCITS
Directive), but this principle could apply irrespective of
the type of investment or instrument. The ECB recognises,
however, that the requirement that (cid:145)connected(cid:146) issuers have

to be regarded as a single risk could impose additional
burdens on the management companies. Therefore, a quali-
tative approach could be considered, possibly as a transi-
tional solution only, whereby the UCITS manager would be
required to ensure that, taking account of the objective of
the scheme and the manager’s policy for achieving that
fund rules or
objective, as stated in the most recent
the scheme provides a
instruments of
prudent
all
investments and instruments. In relation to this alternative
solution the Council may wish to consider the possible
potential for supervisory arbitrage.

distribution of

incorporation,

considering

issuer

risk

10. The ECB recommends that a review is made of a potential
inconsistency between the possibility for more traditional
UCITS of investing in derivatives for hedging and portfolio
management purposes and the rules on the investment
policy of derivatives-specialised UCITS, namely in relation
to the OTC market (to which only the former category
may resort). The Council may wish to consider whether
the use of OTC derivatives should be allowed for all types
of
the same conditions. The relationship
between Article 21 of the Directive and the new Article
the ECB
24a may need to be clarified. Furthermore,
recommends reconsideration of
the draft
that
Directive does not establish any specific limits or other
more specific measures to protect investors against risks
related to derivative transactions.

funds under

the fact

and

specific

determine

(cid:145)prospectuses

provisions which
the

11. The ECB notes that the draft Directive contains a number
obligations
of
any promotional
concerning
the
draft Directive
literature(cid:146)
(see Article 1(9) of
proposing a new Article 24(a) of
the UCITS Directive)
and which deal with obligations concerning the investment
policies of UCITS. The inclusion of these provisions is not
systematic and transparent and may lead to conflicting
solutions. The Council may wish to consider combining
all obligations concerning the mandatory information to
be given to investors in one section of the UCITS Directive.
the EMI’s
In this context,
suggestion, as made in the EMI opinion mentioned above
(CON/94/8),
that consideration should be given to the
imposition of an obligation in the UCITS Directive
stating that the investors should be informed that funds
which constitute close substitutes for deposits (money
market funds/cash funds) will not be subject to deposit
protection.

the ECB wishes

to recall

12. With the aim of reinforcing the soundness and trans-
instruments,
parency of the regulation of these financial
the ECB underlines the need that UCITS should invest, as
a general
investment
rule, only in other (cid:145)coordinated(cid:146)
Investments in non-coordinated funds could be
funds.
possible
safeguards
suitable
protecting the position of the investors.

to further

subject

strict

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13. Respecting the importance of the control function of the
depositary and the necessary strength of the regulation of
UCITS, the Council may wish to reconsider the provisions
restricting or prohibiting transactions with the UCITS’
depositary (Article 1(6) and 1(9) of the draft Directive).
These provisions may be inconsistent with commercial
practice and, instead of being prohibited, could be made
to the requirement of being carried out under
subject
normal commercial
the requirement
concerning the location of subsidiaries might be drafted
in a more flexible way. Subsidiaries outside the EEA
could be accepted subject
to the necessary conditions
relating to efficient supervision of at least the same level
of quality as in the EEA. However,
it is stated in this
the national central banks hold divergent
context
views on these proposals and in some cases are even of
the opinion that none of the proposals is feasible.

terms. Similarly,

that

II. COM(1998) 451 final

that,

sector

in consideration of
(in particular,

1. The ECB notes that the aim of this draft Directive is to
reinforce the single market in the area of UCITS by:
(a)
updating the rules governing management companies by
bringing these into line with those existing for other
operators in the financial services area (banks, investment
the
firms and insurance companies),
these
ongoing growth of
this
operators would receive a (cid:145)European passport(cid:146)
in
accordance with the principles of the Treaty, would allow
them to set up branches in other Member States and to
operate within the EU with the freedom to provide services);
(b)
restrictions which prevent
management companies from engaging in activities other
than the management of the assets of common funds/unit
portfolio
companies
trusts
management);
identifying the functions which the
activity of collective portfolio management comprises; (d)
defining the conditions under which such functions can
be delegated to third parties; and (e) amending the
provisions concerning the information documents to be
given to investors (in this respect the proposal introduces
simplified procedures).

investment

(collective

revising

current

the

(c)

as proposed

the business of

2. The ECB notes in particular that the draft Directive aims at
(cid:145)management
widening the scope of
the
companies(cid:146). This widening and the expansion of
the (cid:145)European
product range as well as the granting of
passport(cid:146)
draft Directive may
in the
substantially contribute to a further process of desinter-
mediation of financial services, in the sense that more and
more financial intermediation will be carried out via insti-
tutional
institutions. As
stated in the EMI opinion (CON/94/8), this may contribute
to significant changes in the business environment and
should
liability
therefore be taken to ensure that the proposed prudential
supervisory regime meets the standards necessary to foster
financial stability and will result in a consistent prudential
framework for all
intermediaries, which takes
account of their specific features.

investors rather than via credit

institutions. Care

structure of

financial

credit

the

suggests

companies(cid:146)

companies,

companies(cid:146),

(cid:145)management

application of

the ECB understands

the
the discretionary portfolio management

3. The ECB notes that the draft Directive proposes that the
specialisation principle applied to date in the area of UCITS
be rendered more flexible. According to the draft Directive,
there will be two distinct types of (cid:145)management companies(cid:146):
those which exclusively engage in the management of unit
trusts/common funds and investment companies and those
which also provide (cid:145)discretionary portfolio management(cid:146).
For the latter category, the draft Directive (Article 1(3) of
the
the draft Directive proposing a new Article 5.4 of
certain
UCITS Directive)
Articles of Directive 93/22/EEC. According to the draft
Directive,
that UCITS may be
managed or (cid:145)constituted(cid:146) by three different types of enter-
prises to which three different sets of rules would apply:
and
(cid:145)investment
authorisation of which
(cid:145)management
covers
service(cid:146).
there might be a certain risk of
The ECB believes that
supervisory arbitrage
and confusion induced by this
relatively complicated structure. In particular, this may be
the case whenever the investment companies outsource
their management activities
to other enterprises. The
Council may wish to consider different possible solutions
on which the national central banks hold divergent views
and in some cases are even of the opinion that none of the
proposals is feasible. First, whether a complete integration
of the UCITS business into the scope and application of
Directive 93/22/EEC might not be preferable and whether
this would provide for the equal and consistent application
investment
of
firms,
the financial
system. Second, the proposed structure could be simplified
by (a)
restriction on the activities of
management companies in the UCITS Directive, or (b)
allowing the credit
firms and
insurance companies authorised under the relevant single
market Directives to manage the assets of UCITS as well
the Investment
as individual portfolios by extension of
Services Directive and the Second Banking Directive.
Third, the scope of the proposed new Article 5(g) of the
UCITS Directive (which deals exclusively with management
companies) may be enlarged to also cover
investment
companies, and to the foreseen requirements a further
requirement could be added stating that the mandate may
be conferred only upon credit institutions and investment
firms authorised under the relevant single market Directives
and upon similar third country institutions that are subject
to equivalent prudential requirements. Whichever solution
may be developed, the objective of avoiding conflicts of
interest should be pursued. Moreover, the ECB would like
to stress the importance of equivalent prudential rules being
applicable to the different intermediaries.

the supervisory standards elobarated for
thus better ensuring the stability of

removing the

institutions,

investment

4. The ECB notes that the draft Directive proposes certain
cooperation obligations
(cid:145)competent authorities(cid:146). The
for
ECB welcomes the respective provisions and would like to
suggest that the Council considers even broader cooperation
obligations which would also include cooperation with
insurance
authorities competent
undertakings,
own
subsidiaries active in the UCITS business.

in the supervision of
such

undertakings

often

since

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provides

the UCITS Directive)

5. Article 1(3) of the draft Directive (proposed new Article 5
of
that mangement
companies shall be granted an official authorisation by the
competent authorities in the home Member States and that
such authorisation shall be valid in all Member States. This
impact on the List of Monetary
provision has a direct
Financial Institutions, in so far as management companies
managing money market
funds will be able to operate
through branches which are established in other Member
States. With respect to the activities of the European System
of Central Banks (hereinafter referred to as the (cid:145)ESCB(cid:146)), the
ECB notes that this provision has the effect that the national
central bank of the Member State in which such branches
are located will have to report the branches as domestic
Institutions and include the reference
Monetary Financial
and residence of the head office, as is currently the case
for credit institutions.

for

statistical purposes,

6. Article 1(3) of the draft Directive (proposed new Article 6(c)
of the UCITS Directive) provides that the host Member State
require all management
may,
companies with branches within its territory to report peri-
odically on their activities
to the competent national
authority in that host Member State. With respect to the
activities of the ESCB, the ECB notes that this provision
does not prejudice the collection of additional statistical
information in accordance with Article 5 of the Statute of
the European System of Central Banks and of the European
Central Bank.

investment

fund rules,

instruments of

that (cid:145)the criteria identifying a money market fund may be derived
from the public prospectus,
incor-
poration, established statutes or by-laws, subscription documents
or
contracts, marketing documents, or any other
statement with similar effect, of the collective investment under-
takings(cid:146). This provision implies that even a full prospectus
may not be sufficiently detailed in every case. The ECB
notes that the introduction of a simplified prospectus,
in
addition to the full prospectus, does not change the
the draft Directive
existing situation, as Schedule C of
foresees under (cid:145)Investment
Information(cid:146) a rather general
definition of the objectives, investment policy and historical
performance of the UCITS and the profile of the typical
investors for which they are designed. The ECB states that
this general definition may not be sufficiently detailed to
provide a basis for
the
various UCITS in or from the list of Monetary Financial
Institutions. Therefore, consideration may need to be given
to amending the definition accordingly.

the inclusion or exclusion of

8. As already outlined under Article I.8., the ECB suggests that
the relationship between the UCITS Directive and the legal
definition of money market funds set out in the ECB Regu-
lation concerning the consolidated balance sheet of
the
Monetary Financial
Institutions (ECB/1998/16) should be
clarified in a recital (introduced by (cid:145)whereas(cid:146)) to the draft
Directive.

7. Article 1(5) of the draft Directive (proposed new Article 27,
paragraph 1, and Article 28, paragraph 1 of the UCITS
Directive) provides for simplified prospectus requirements.
According to these draft provisions, only the distribution of
a simplified prospectus is mandatory, whereas the full
prospectus shall be provided, free of charge, at the investor’s
request. The elements to be contained in the simplified
prospectus are outlined in Schedule C annexed to the
draft Directive. With respect to the ECB’s legal definition
of money market funds, the ECB notes that the ECB’s defi-
nition in Annex 1, Part I, Section I, paragraph 5 to the ECB
Regulation concerning the consolidated balance sheet of the
Monetary Financial Institutions sector (ECB/1998/16) states

9. The Council may wish to consider a significant increase of
the initial capital required in the proposed new Article
5(a)(1)(a) of
amount of
the UCITS Directive. The
EUR 50 000 (1) does not seem to be an adequate capital
base for the activities allowed.

This ECB opinion will be published in the Official Journal of the
European Communities.

Done at Frankfurt am Main, 16 March 1999.

The President of the ECB

Willem F. DUISENBERG

(1) The ECB assumes that all references to ECU will be replaced by

references to the euro.