Opinion of the European Central Bank of 12 December 2006 on a draft Commission Directive implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions (CON/2006/57)
Date: 2006-12-12
Institutions: European Central Bank
Subjects: EC Directive, European Central Bank, financial legislation, interinstitutional relations (EU), investment company

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I

(Resolutions, recommendations, guidelines and opinions)

OPINIONS

EUROPEAN CENTRAL BANK

OPINION OF THE EUROPEAN CENTRAL BANK

of 12 December 2006

on a draft Commission Directive implementing Council Directive 85/611/EEC on the coordination
of laws, regulations and administrative provisions relating to undertakings for collective investment
in transferable securities (UCITS) as regards the clarification of certain definitions

(CON/2006/57)

(2007/C 31/01)

Introduction and legal basis

The ECB is submitting this opinion on its own initiative to the Commission on a draft Commission Direc-
tive implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative
provisions relating to undertakings for collective investment in transferable securities (UCITS) (1) as regards
the clarification of certain definitions (2) (hereinafter the ‘proposed directive’). The main objective of the
proposed directive, which is an implementing measure issued on the basis of Article 53a of the UCITS
Directive, is to clarify the meaning and the scope of certain definitions under the UCITS Directive in order
to ensure its uniform application throughout the European Union and improve the functioning of the
UCITS product passport (3).

The ECB's competence to deliver an opinion on the proposed directive is based on Article 105(4) of the
Treaty establishing the European Community, since the proposed directive is linked to the implementation
of the monetary policy of the euro area, particularly with regard to the functioning of European money
markets. In this respect, the ECB considers that proposed Level 2 acts constitute ‘proposed Community acts’
within the meaning of Article 105(4) of the Treaty. The ECB would therefore have expected the Commission
to take the initiative to formally consult the ECB on the proposed directive, in accordance with the relevant
Treaty provisions. Considering that the ECB has several comments with respect to the proposed directive,
the ECB has decided to submit this opinion on its own initiative. In accordance with the first sentence of
Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted
this opinion.

(1) Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provi-
sions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 375, 31.12.1985, p 3).
Directive as last amended by Directive 2005/1/EC (OJ L 79, 24.3.2005, p. 9), (hereinafter the ‘UCITS Directive’).

(2) Commission Working Document ESC/43/2006.
(3) The ECB notes that both the European Monetary Institute, precursor to the ECB, and the ECB itself were consulted by the
Council on the UCITS Directive in 1995 and 1999, respectively. See Opinion of the European Monetary Institute CON/
1994/8 of 27 July 1995 on a Commission proposal for a Directive relating to undertakings for collective investment in
transferable securities (UCITS); ECB Opinion CON/98/54 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, OJ C 285, 7.10.1999, p. 9.

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1. General observations

1.1 An efficient and well-integrated financial system is important for the smooth and effective transmission
of monetary policy throughout the euro area. While this applies to all segments of the financial system,
it is of particular importance with regard to the market segment most directly relevant for the imple-
mentation of monetary policy, namely the money market. The European short-term securities market is
the least integrated money market segment in the EU. Therefore, the ECB follows with particular atten-
tion regulatory as well as market-led initiatives that aim at enhancing the integration, development and
transparency of short-term securities markets in Europe (4).

1.2 The even implementation and interpretation of EU legislation is a crucial dimension for building up the
internal market in financial services. Against this background, the choice of a directive as the legal
instrument to achieve this even implementation in this case seems to contradict the objective of the
implementing measures in relation to the UCITS Directive, which is to clarify the definitions ‘in order
to ensure uniform application of this Directive throughout the Community’ (5), to ‘enhance a common
reading as to whether certain assets are eligible for investment under the UCITS Directive’, to ‘reduce
the potential of divergent interpretations of the UCITS Directive’ and to ‘improve legal certainty and
enable a more coherent interpretation of the UCITS Directive’ (6). A proposed implementing measure in
the form of a regulation containing detailed provisions capable of direct application to all UCITS could
more appropriately remedy the current uneven application of some general principles contained in the
UCITS Directive (for instance, regarding the rules on the eligibility of money market instruments).

2. Specific comments

2.1 First, as regards disclosure and information requirements, the proposed directive introduces various
requirements depending on the legal nature of the issuer. For example, for money market instruments
issued by establishments subject to prudential supervision (7), the information can be confined to either
information on the issue or issuance programme or on the legal and financial situation of the issuer
prior to the issue of the money market instrument (8). Whereas for non-financial corporations (9) the
requirements include information on the issue and issuance programme as well as on the legal and
financial situation of the issuer. The Commission indicates that this differentiation takes into account
that ‘e.g. certain certificates of deposits would have difficulties to comply with certain criteria under
Article 5(2)’ of the proposed directive. In general, the ECB considers that for the smooth and efficient
functioning of the market, it is important that adequate and standardised information, as well as stan-
dardised statistics, are accessible to market participants. Therefore, it is recommended to adopt the same
wording for Article 5(3)(a) as for Article 5(2)(a) of the proposed directive.

2.2 Second, the inclusion of money market instruments issued by a Member State's local or regional
authority (or, in the case of a Member State that is a federal State, a member of the federation) that are
not guaranteed by a Member State under Article 5(2) ('other' issuers), rather than under Article 5(4) of
the proposed directive (i.e. alongside other public entities of Member States), might require further
consideration. Local, regional and federal authorities in the EU generally enjoy financial support from
their respective Member States as well as a special status under national insolvency laws. Moreover, the
question of whether the liabilities of local, regional and federal authorities in the EU are formally guar-
anteed by their Member States could raise complex questions in certain cases, and might not therefore
provide an appropriate basis for differentiating instruments with or without guarantee. Consideration
could be given to treating all regional, local and (for the UCITS Directive) federal authorities of Member

(4) For this reason, the ECB supports the Short-Term European Paper (STEP) initiative, which is a market-led initiative
promoted by the Financial Markets Association (ACI) and the European Banking Federation (FBE), which aims to foster the
integration and development of the European markets for short-term securities through the convergence of market stan-
dards. The STEP Market Convention indicates the criteria and requirements that need to be fulfilled for an issuance
programme to be STEP-compliant and thus obtain the STEP label. These criteria refer to disclosure, documentation format,
settlement and the provision of data for the production of STEP statistics.

(5) See Article 53a (1) of the UCITS Directive (emphasis added).
(6) See Background note, p.1, third paragraph.
(7) I.e. the issuers covered by Article 5(3) of the proposed directive.
(8) Article 5(3)(a) of the proposed directive.
(9) Article 5(2)(a) of the proposed directive.

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States in the same way in both the ‘Level 1’ UCITS Directive (the first indent of Article 19(1)(h)) and the
Prospectus Directive 2003/71/EC (10). Similar arguments can be made for public international bodies.
Thus, the Commission might consider amending Article 5(2) of the proposed directive by deleting the
reference to local, regional and federal authorities of Member States, as well as public international
bodies, in order to treat all such public entities in the same way.

2.3 Third, Article 5(3)(c) of the proposed directive refers to the need for reliable statistics on the issue or
issuance programme ‘or other data enabling an appropriate assessment of the credit risks related to the
investment in such instruments’. It should be noted in this respect that the availability of reliable statis-
tics and the availability of other data enabling an assessment of credit risks are two distinct and desir-
able features of a market, which overlap only partially. Therefore, one should not be treated as equiva-
lent to the other. Furthermore, this criterion is partly redundant if read in conjunction with Article 5(1)
instruments referred to in Article 19(1)(h) of the
(b) which already provides that, for the financial
UCITS Directive, information should be available allowing ‘an appropriate assessment of the credit risks
related to the investment in such instruments’. Therefore, the reference to ‘or other data enabling an
appropriate assessment of the credit risks related to the investment in such instruments’ in Article 5(3)
(c) of the proposed directive should be deleted.

2.4 Fourth, the reference to the ‘control of the information’ by ‘an appropriately qualified third party’ in
Article 5(2)(c) of the proposed directive gives rise to some important difficulties of interpretation. In its
previous explanatory notes (11), the Commission indicated that dealers, auditors, public bodies or other
market structures could be eligible to the extent that they are not subject to instructions from the
issuer. According to the Commission, the purpose of this criterion is to ensure that information on
instruments issued by corporate entities — particularly considering that these entities are not supervised
or regulated — is reliable and subject to a qualified scrutiny. However, the Commission's proposal
leaves some flexibility as to how this can be achieved and does not impose a specific structure. It is not
clear who should ultimately decide on the ‘appropriateness’ of the third party. In addition, Article 5(2)
(c) of the proposed directive provides that the control of the information concerns both the issue or the
issuance programme and the legal and the financial situation of the issuer. However, depending on the
nature of the third party, the controling entity will not necessarily ‘control’ both of these elements. For
instance, an auditor will control the financial situation of the issuer but not the programme. It is
doubtful that law firms and dealers could be considered as controlling financial information. Moreover,
a public entity might control the programme but not necessarily the financial situation of the issuer.
Lastly, the introduction of unspecified information control mechanisms by ‘an appropriately qualified
third party’ (12) into the proposed directive would seem to approximate the information requirements
for money market instruments to those applied for formal prospectuses. In this respect it should be
underlined that prospectus requirements appear to be exhaustively covered by the Prospectus Directive,
under which money market instruments are exempted from the definition of securities (13).

2.5 Evidently, the discretion granted to Member States regarding the application of this criterion contradicts
the objective of these implementing measures, which is to provide more legal certainty and to ensure
uniform application. Therefore, unless it is possible to clarify the meaning of the provision, which
seems to be problematic in view of the various situations possibly covered, it is suggested to drop this
criterion altogether.

2.6 Fifth, Article 5(4) of the proposed directive provides that, for all money market instruments covered by
the first indent of Article 19(1)(h) of the UCITS Directive (except those referred to in paragraph 2 of
this Article), appropriate information shall consist of information on the issue or issuance programme
or on the legal and financial situation of the issuer prior to the issue of money market instrument. In
terms of issuers, the first indent of Article 19(1)(h) of the UCITS Directive covers in particular non-
Member States, the EU, the European Investment Bank, the ECB and central banks of a Member State.

(10) Article 1(2)(d) of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the
prospectus to be published when securities are offered to the public or admitted to trading and amending Directive
2001/34/EC (OJ L 345, 31.12.2003, p. 64).

(11) See Working document ESC/24/2006.
(12) Article 5(2)(c) of the proposed directive.
(13) Article 2(1)(a) of Directive 2003/71/EC.

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This proposed provision would therefore apply to the investment by collective investment undertakings
in certain instruments issued by central banks and used in the implementation of monetary policy (14).
Taking into account the fact that the information on the issuer's legal and financial situation would not
be of direct relevance for UCITS investors in the case of central banks, and also having regard to the
Eurosystem's prerogatives regarding the conditions of
the ECB
proposes to amend Article 5(4) of the proposed directive in order to exclude all money market instru-
ments issued by either the ECB or a Member State central bank from the application of that paragraph.

issuance of such instruments (15),

2.7 Finally, Article 3(2) of the Commission's proposed directive defines money market instruments as instru-
ments normally dealt in on the money market which fulfil one of the following criteria: (i) they have a
maturity at issuance of up to 397 days; or (ii) they have a residual maturity of up to 397 days; or (iii)
they undergo regular yield adjustments in line with money market conditions at least every 397 days;
or (iv) their risk profile corresponds to that of financial instruments which have a maturity of up to
397 days or are subject to a yield adjustment as referred to in point (iii). The Commission's attention is
drawn to the fact that this definition is not consistent with the definition of money market instruments
in Regulation ECB/2001/13 (16), which refers to a residual maturity of up to and including one year, or
regular yield adjustments in line with money market conditions at least every 12 months. The ECB is
aware that the proposed 397 day period is the outcome of a suggestion by CESR that the 12-month
maturity be extended to 397 days to include the risk of settlement delays which may result in a breach
in the event of a delay in settling the instrument (17). It is suggested to return to the solution proposed
by the Commission in earlier drafts of the proposed directive, which set a maturity period of one year
‘without prejudice to any additional delay for settlement as provided for in the issue or the issuance
programme’.

3. Drafting proposals

Where the above advice would lead to changes in ‘the proposed directive’, drafting proposals are set out
in the Annex.

Done at Frankfurt am Main, 12 December 2006.

The President of the ECB

Jean-Claude TRICHET

(14) For example, as part of the Eurosystem's open market operations the ECB may issue debt certificates with the aim of
adjusting the Eurosystem's structural position vis-à-vis the financial sector so as to create or enlarge a liquidity shortage in
the market. These debt certificates have a maturity of less than 12 months. The terms and conditions for such debt certifi-
cates are established by the ECB (see European Central Bank, The Implementation of Monetary Policy in the Euro Area:
General Documentation on Eurosystem Monetary Policy Instruments and Procedures, September 2006, p. 17).

(15) See Article 105(2), first indent, of the Treaty Establishing the European Community (the ‘Treaty’), as well as Articles 18(2)
and 20 of the Protocol annexed to the Treaty on the Statute of the European Central Bank and of the European System of
Central Banks.

(16) See the fifth indent of point 7 in Annex 1to Regulation ECB/2001/13 of 22 November 2001 concerning the consolidated
balance sheet of the monetary financial institutions sector, (OJ L 333, 17.12.2001, p. 1). Regulation as last amended by
Regulation ECB/2004/21 (OJ L 371, 18.12.2004, p. 42).

(17) CESR's Advice to the European Commission on Clarification of Definitions concerning Eligible Assets for Investments of

UCITS (January 2006) (CESR/06-005), p. 20, points 63-64.

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ANNEX

Drafting proposals

Text proposed by the Commission

Amendments proposed by the ECB (1)

Amendment 1

Article 5(2)

For money market instruments covered by the second and
the
fourth indents of Article 19(1)(h) of Directive
85/611/EEC, or for those which are issued by a local or
regional authority of a Member State or by a public interna-
tional body but are not guaranteed by a Member State or,
in the case of a federal State which is a Member State, by
one of the Members making up the federation, appropriate
information as referred to in point (b) of paragraph 1 of
this Article shall consist in the following:

For money market
instruments covered by the second,
third and the fourth indents of Article 19(1)(h) of Directive
85/611/EEC, or for those which are issued by a local or
regional authority of a Member State or by a public interna-
tional body but are not guaranteed by a Member State or,
in the case of a federal State which is a Member State, by
one of the Members making up the federation, appropriate
information as referred to in point (b) of paragraph 1 of
this Article shall consist in the following:

(a) information on both the

issuance
programme and the legal and financial situation of the
issuer prior to the issue of the money market instru-
ment;

issue or

the

(b) up-dates of the information referred to in point (a) on a
regular basis and whenever a significant event occurs;

(c) control of the information referred to in point (a) by an
to

appropriately qualified third party not
instructions from the issuer;

subject

(d) availability of reliable statistics on the issue or issuance

programmes.

(a)

(b)

(c)

information on both the issue or
the issuance
programme and the legal and financial situation of
the issuer prior to the issue of the money market
instrument;

up-dates of the information referred to in point (a) on
a regular basis and whenever a significant event
occurs;

control of the information referred to in point (a) by
an appropriately qualified third party not subject to
instructions from the issuer;

(cd) availability of reliable statistics on the issue or issu-

ance programmes.

Justification — See paragraphs 2.1-2.5 of the opinion

Amendment 2

Article 5(3)

For money market instruments covered by the third indent
of Article 19(1)(h) of Directive 85/611/EEC, appropriate
information as referred to in point (b) of paragraph 1 of
this Article shall consist in the following:

For money market instruments covered by the third indent
of Article 19(1)(h) of Directive 85/611/EEC, appropriate
information as referred to in point (b) of paragraph 1 of
this Article shall consist in the following:

(a) information on the issue or issuance programme or on
the legal and financial situation of the issuer prior to
the issue of the money market instrument;

(a) information on the issue or issuance programme or on
the legal and financial situation of the issuer prior to
the issue of the money market instrument;

(b) up-dates of the information referred to in point (a) on a
regular basis and whenever a significant event occurs;

(b) up-dates of the information referred to in point (a) on a
regular basis and whenever a significant event occurs;

(c) availability of reliable statistics on the issue or issuance
programme or other data enabling an appropriate
assessment of the credit risks related to the investment
in such instruments.

(c) availability of reliable statistics on the issue or issuance
programme or other data enabling an appropriate
assessment of the credit risks related to the investment
in such instruments.

Justification — See paragraphs 2.1-2.5 of the opinion

(1) Bold in the body of the text indicates where the ECB proposes inserting new text. Strikethrough in the body of the text indicates where

the ECB proposes deleting the text.

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Amendment 3

Article 5(4) would become Article 5(3)

For all money market instruments covered by the first
indent of Article 19(1)(h) of Directive 85/611/EEC except
those referred to in paragraph 2 of this Article, appropriate
information as referred to in point (b) of paragraph 1 of
this Article shall consist in information on the issue or issu-
ance programme or on the legal and financial situation of
the issuer prior to the issue of the money market instru-
ment.

For all money market instruments covered by the first
indent of Article 19(1)(h) of Directive 85/611/EEC except
those referred to in paragraph 2 of this Article and those
issued by the European Central Bank or a central bank
of a Member State, appropriate information as referred to
in point (b) of paragraph 1 of this Article shall consist in
information on the issue or issuance programme or on the
legal and financial situation of the issuer prior to the issue
of the money market instrument.

Justification — See paragraphs 2.6 of the opinion

Amendment 4

Article 3(2)

The reference in Article 1(9) of Directive 85/611/EEC to
money market instruments as instruments normally dealt
in on the money market shall be understood as a reference
to financial instruments which fulfil one of the following
criteria:

(i) they have a maturity at issuance of up to and including

397 days;

(ii) they have a residual maturity of up to and including

397 days;

(iii) they undergo regular yield adjustments in line with
money market conditions at least every 397 days;

(iv) their risk profile,

including credit and interest rate
instruments
risks, corresponds to that of
financial
which have a maturity as referred to in points (i) or (ii),
or are subject to a yield adjustment as referred to in
point (iii).

The reference in Article 1(9) of Directive 85/611/EEC to
money market instruments as instruments normally dealt
in on the money market shall be understood as a reference
to financial instruments which, without prejudice to any
additional delay for settlement as provided for in the
issue or the issuance programme,
the
following criteria:

fulfil one of

(i) they have a maturity at issuance of up to and including

one year 397 days;

(ii) they have a residual maturity of up to and including

one year 397 days;

(iii) they undergo regular yield adjustments in line with
money market conditions at least every one year 397
days;

(iv) their risk profile,

including credit and interest rate
risks, corresponds to that of
instruments
financial
which have a maturity as referred to in points (i) or (ii),
or are subject to a yield adjustment as referred to in
point (iii).

Justification — See paragraph 2.7 of the opinion