Commission Directive 2007/16/EC of 19 March 2007 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 (Text with EEA relevance )
Date: 2007-03-19
Institutions: European Commission
Subjects: approximation of laws, financial instrument, free movement of capital, investment company, money market, securities

20.3.2007

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Official Journal of the European Union

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DIRECTIVES

COMMISSION DIRECTIVE 2007/16/EC

of 19 March 2007

implementing Council Directive 85/611/EEC on the coordination of
administrative provisions relating to undertakings for collective investment

laws, regulations and
in transferable

securities (UCITS) as regards the clarification of certain definitions

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,

establishing the European

Having regard to Council Directive 85/611/EEC of 20
December 1985 on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective
in transferable
investment
and in
particular point (a) of Article 53a thereof,

(UCITS) (1),

securities

Whereas:

(1)

(2)

(3)

several

85/611/EEC contains

definitions,
Directive
sometimes interlinked, related to the assets which are
eligible for investment by undertakings for collective
investment in transferable securities, hereinafter ‘UCITS’,
such as a definition of transferable securities and a defi-
nition of money market instruments.

Since the adoption of Directive 85/611/EEC, the variety
of financial instruments traded on financial markets has
leading to uncertainty in deter-
increased considerably,
mining whether
financial
encompassed by those definitions.
instruments
Uncertainty in applying the definitions gives rise to
divergent interpretations of the Directive.

categories

certain

are

of

In order to ensure a uniform application of Directive
85/611/EEC,
to develop a
to help Member States
common understanding as to whether a given asset
category is eligible for a UCITS and to ensure that the
definitions are understood in a manner consistent with

(1) OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive
2005/1/EC of the European Parliament and of the Council (OJ L 79,
24.3.2005, p. 9).

and

limits

governing

the principles underlying Directive 85/611/EEC, such as
those
to
risk-diversification
exposure, the ability of the UCITS to redeem its units
at the request of the unit-holders and to calculate its net
asset value whenever units are issued or redeemed, it is
necessary to provide competent authorities and market
participants with more certainty in this respect. Greater
certainty will also facilitate a better functioning of the
notification procedure for the cross-border distribution
of UCITS.

The clarifications provided by this Directive do not of
themselves give rise to any new behavioural or oper-
ational obligations for competent authorities or market
participants. Rather than establishing exhaustive lists of
financial
they elucidate
basic criteria as an aid in assessing whether or not a
class of financial
instrument is covered by the various
definitions.

instruments and transactions,

to

the

other

requirements

The eligibility of an asset for a UCITS must be assessed
not only with regard to whether it falls within the scope
of the definitions as clarified by this text but also with
regard
of Directive
85/611/EEC. National competent authorities could work
together through the Committee of European Securities
Regulators (CESR) to develop common approaches on
the practical, day-to-day application of those clarifications
in the context of their supervisory duties, notably in
connection with
of Directive
risk management
85/611/EEC such as
procedures, and to ensure the smooth functioning of
the product passport.

requirements

control or

other

point

from a

transferable

formal/legal

securities
Directive 85/611/EEC defines
view.
of
exclusively
transferable securities is
Accordingly the definition of
applicable to a wide range of financial products with
differing features and different
liquidity. For
those financial products, consistency between
each of
the definition of
and other
provisions of the Directive should be ensured.

transferable

securities

levels of

(4)

(5)

(6)

(7)

(8)

(9)

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Official Journal of the European Union

20.3.2007

Closed end funds constitute an asset class which is not
explicitly referred to as an eligible asset for a UCITS
the units of
under Directive 85/611/EEC. However,
closed end funds are often treated as
transferable
securities and their admission to trading on a regulated
market often gives grounds for such a treatment. It is
therefore necessary to provide market participants and
competent authorities with certainty as
to whether
units of closed end funds are covered by the definition
of transferable securities. National competent authorities
could work together
through the CESR to develop
common approaches as regards the practical, day-to-day
application of the criteria applicable to closed end funds,
notably in respect of minimum core standards in relation
to corporate governance mechanisms.

(11)

Additional legal certainty is also necessary with regard to
the categorisation, as transferable securities, of financial
instruments which are linked to the performance of other
assets,
including assets which are not referred to by
Directive 85/611/EEC itself, or which are backed by
such assets. It should be made clear that if the linkage
to the underlying or
the
instrument amounts to an element which has to be
the financial
considered as an embedded derivative,
transferable
in the
instrument
securities embedding a derivative element. This has the
consequence
criteria for derivatives under
Directive 85/611/EEC have to be applied in respect of
that element.

to another component of

subcategory of

falls

that

the

if credit derivatives
should also be made clear
comply with those criteria, they are financial derivative
instruments within the meaning of Directive 85/611/EEC
and hence eligible for treatment as liquid financial assets.

that

The need for clarification is particularly pressing for
indices. There is currently a
derivatives on financial
wide range of financial
indices which function as the
underlying for a derivative instrument. These indices
may vary as regards their composition or the weighting
of their components. In all cases it has to be ensured that
the UCITS is able to fulfil
its obligations as regards
resulting from Article 37 of
portfolio liquidity, as
Directive 85/611/EEC, and the calculation of
the net
asset value and that those obligations are not negatively
affected by the features of the underlying of a derivative.
It should be clarified that derivatives on financial indices
sufficiently diversified, which
whose composition is
represent an adequate benchmark to the market
to
which they refer and which are subject to appropriate
information regarding the index composition and calcu-
lation fall under the category of derivatives as liquid
financial assets. National competent authorities could
work together through the CESR to develop common
approaches as regards the practical, day-to-day appli-
cation of those criteria in respect of indices based on
assets which are not individually identified as eligible
assets in the Directive.

a

taking

criteria

In order to be covered by the definition of money market
financial
in Directive 85/611/EEC,
instruments
instrument should fulfil certain criteria, notably it must
normally be dealt in on the money market, it must be
liquid and it must have a value which can be accurately
It
determined at any time.
is necessary to ensure a
into
those
uniform application of
account certain market practices. It is also necessary to
the criteria have to be understood in
clarify that
coherence
Directive
principles
with
85/611/EEC.
of money market
instruments
should extend to financial
instruments
which are not admitted to or dealt in on a regulated
market and for which Directive 85/611/EEC sets out
criteria in addition to the general criteria for money
It was therefore equally necessary
market instruments.
to clarify those criteria in the light of investor protection
requirements and taking into account principles of the
Directive such as portfolio liquidity, as resulting from
Article 37 thereof.

definition

other

The

of

(10) Under Directive

financial

85/611/EEC

derivative
instruments are to be considered as liquid financial
assets if they fulfil the criteria set out in that Directive.
It is necessary to ensure a uniform application of those
criteria and it is also necessary to make clear that the
criteria have to be understood in a way which is
It
consistent with other provisions of

the Directive.

instrument does not

(12) Directive 85/611/EEC recognises as a sub-category of
instruments
transferable securities and money market
those which embed a derivative element. Embedding a
derivative element into a transferable security or money
market
transform the whole
financial instrument into a financial derivative instrument
which would fall outside the definitions of transferable
security or money market instrument. Therefore,
it is
necessary to make clear whether a financial derivative
can be considered embedded in another instrument. In
addition, embedding a derivative into a transferable
instrument entails the risk
security or money market
that
imposed by Directive
85/611/EEC are bypassed. For that reason, the Directive
requires
embedded derivative
element and compliance with those rules. Given the
level of
the identification of an
embedded derivative element is not always evident. In
order to achieve more certainty in this respect, criteria
for identifying such elements should be laid down.

identification of

for derivatives

innovation,

the rules

financial

the

(13)

techniques

to Directive 85/611/EEC,

and
Pursuant
instruments relating to transferable securities or money
market instruments for the purpose of efficient portfolio
management do not fall under the definitions of trans-
instruments. To
ferable securities and money market
is
the boundaries of
clarify

those definitions

it

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Official Journal of the European Union

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fall

those

under

techniques

necessary to set out criteria to identify the transactions
which would
and
instruments. It is also necessary to recall that those tech-
niques and instruments have to be understood in
coherence with the other obligations of a UCITS,
particularly as regards its risk profile. That is to say,
they must be consistent with the rules laid down by
Directive 85/611/EEC on risk management and on risk
diversification, as well as with its restrictions on short
sales and borrowing.

(14) Directive 85/611/EEC sets out criteria to define UCITS
which replicate bond or share indices. UCITS which
to a more
comply with those criteria are subject
flexible treatment as regards issuer concentration limits.
It is therefore necessary to develop a clear understanding
of those criteria and to ensure their uniform application
in all Member States. That entails giving further clarifi-
cation as to whether a UCITS can be considered to be an
index-replicating UCITS, and thus more certainty about
the conditions which justify the preferential treatment of
index-replicating UCITS.

(15)

The Committee of European Securities Regulators has
been consulted for technical advice.

(16)

The measures provided for
in this Directive are in
accordance with the opinion of the European Securities
Committee,

HAS ADOPTED THIS DIRECTIVE:

Article 1

Subject matter

6.

index-replicating UCITS, as referred to in Article 22a(1) of
Directive 85/611/EEC.

Article 2

Article 1(8) of Directive 85/611/EEC

Transferable securities

1.
The reference in Article 1(8) of Directive 85/611/EEC to
transferable securities shall be understood as a reference to
financial instruments which fulfil the following criteria:

(a)

the potential loss which the UCITS may incur with respect
to holding those instruments is limited to the amount paid
for them;

(b) their liquidity does not compromise the ability of the UCITS

to comply with Article 37 of Directive 85/611/EEC;

(c) reliable valuation is available for them as follows:

(i) in the case of securities admitted to or dealt in on a
regulated market as referred to in points (a) to (d) of
Article 19(1) of Directive 85/611/EEC, in the form of
accurate, reliable and regular prices which are either
market prices or prices made available by valuation
systems independent from issuers;

This Directive lays down rules clarifying, for the purposes of
their uniform application, the following terms:

1. transferable securities, as defined in Article 1(8) of Directive

85/611/EEC;

(ii) in the case of other securities as referred to in Article
in the form of a
19(2) of Directive 85/611/EEC,
valuation on a periodic basis which is derived from
information from the issuer of the security or from
competent investment research;

2. money market instruments, as defined in Article 1(9) of

(d) appropriate information is available for them as follows:

Directive 85/611/EEC;

3.

liquid financial assets, as referred to in the definition of
UCITS laid down in Article 1(2) of Directive 85/611/EEC,
with respect to financial derivative instruments;

4. transferable

securities

instruments
embedding derivatives, as referred to in the fourth sub-
paragraph of Article 21(3) of Directive 85/611/EEC;

and money market

(i) in the case of securities admitted to or dealt in on a
regulated market as referred to in points (a) to (d) of
Article 19(1) of Directive 85/611/EEC, in the form of
regular, accurate and comprehensive information to the
market on the security or, where relevant, on the
portfolio of the security;

5. techniques and instruments for the purpose of efficient
portfolio management, as referred to in Article 21(2) of
Directive 85/611/EEC;

(ii) in the case of other securities as referred to in Article
19(2) of Directive 85/611/EEC, in the form of regular
and accurate information to the UCITS on the security
or, where relevant, on the portfolio of the security;

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(e)

they are negotiable;

(c)

financial instruments which fulfil the following criteria:

(f)

their acquisition is consistent with the investment objectives
or the investment policy, or both, of the UCITS pursuant to
Directive 85/611/EEC;

(i) they fulfil the criteria set out in paragraph 1;

(g) their risks are adequately captured by the risk management

process of the UCITS.

(ii) they are backed by, or linked to the performance of,
other assets, which may differ from those referred to in
Article 19(1) of Directive 85/611/EEC.

For the purposes of points (b) and (e) of the first subparagraph,
and unless there is information available to the UCITS that
instruments
would lead to a different determination, financial
which are admitted or dealt
in
accordance with points (a),
(c) of Article 19(1) of
Directive 85/611/EEC shall be presumed not to compromise
the ability of
the UCITS to comply with Article 37 of
Directive 85/611/EEC and shall also be presumed to be nego-
tiable.

in on a regulated market

(b) or

2.
Transferable securities as referred to in Article 1(8) of
Directive 85/611/EEC shall be taken to include the following:

(a) units

in closed end funds

constituted as

companies or as unit
criteria:

trusts which fulfil

investment
the following

(i) they fulfil the criteria set out in paragraph 1;

(ii) they are subject to corporate governance mechanisms

applied to companies;

(iii) where asset management activity is carried out by
another entity on behalf of the closed end fund, that
entity is subject to national regulation for the purpose
of investor protection;

(b) units in closed end funds constituted under the law of

contract which fulfil the following criteria:

instrument covered by point

3. Where a financial
(c) of
paragraph 2 contains an embedded derivative component as
referred to in Article 10 of this Directive, the requirements of
Article 21 of Directive 85/611/EEC shall apply to that
component.

Article 3

Article 1(9) of Directive 85/611/EEC

Instruments normally dealt in on the money market

1.
The reference in Article 1(9) of Directive 85/611/EEC to
money market instruments as instruments shall be understood
as a reference to the following:

(a)

financial instruments which are admitted to trading or dealt
in on a regulated market in accordance with points (a), (b)
and (c) of Article 19(1) of Directive 85/611/EEC;

(b) financial instruments which are not admitted to trading.

The reference in Article 1(9) of Directive 85/611/EEC to
2.
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:

(a)

they have a maturity at issuance of up to and including 397
days;

(i) they fulfil the criteria set out in paragraph 1;

days;

(b) they have a residual maturity of up to and including 397

(ii) they are subject to corporate governance mechanisms
equivalent to those applied to companies as referred to
in point (a)(ii);

(c)

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

(iii) they are managed by an entity which is subject to
investor

the purpose of

regulation for

national
protection;

(d) their risk profile,

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

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Article 4

Article 1(9) of Directive 85/611/EEC

Liquid instruments with a value which can be accurately
determined at any time

1.
The reference in Article 1(9) of Directive 85/611/EEC to
money market instruments as instruments which are liquid shall
be understood as a reference to financial instruments which can
be sold at limited cost in an adequately short time frame, taking
into account
the UCITS to repurchase or
redeem its units at the request of any unit holder.

the obligation of

2.
The reference in Article 1(9) of Directive 85/611/EEC to
money market instruments as instruments which have a value
which can be accurately determined at any time shall be
instruments for which
understood as a reference to financial
accurate and reliable valuations
the
following criteria, are available:

systems, which fulfil

(a)

they enable the UCITS to calculate a net asset value in
accordance with the value at which the financial instrument
held in the portfolio could be exchanged between knowl-
edgeable willing parties in an arm’s length transaction;

(b) they are based either on market data or on valuation models

including systems based on amortised costs.

The criteria referred to in paragraphs 1 and 2 shall be
3.
presumed to be fulfilled in the case of financial
instruments
which are normally dealt in on the money market for the
purposes of Article 1(9) of Directive 85/611/EEC and which
are admitted to, or dealt in on, a regulated market in accordance
with points (a), (b) or (c) of Article 19(1) thereof, unless there is
information available to the UCITS that would lead to a
different determination.

Article 5

Article 19(1)(h) of Directive 85/611/EEC

Instruments of which the issue or issuer is regulated for
the purpose of protecting investors and savings

1.
The reference in Article 19(1)(h) of Directive 85/611/EEC
to money market instruments, other than those dealt in on a
regulated market, of which the issue or the issuer is itself
regulated for the purpose of protecting investors and savings,
shall be understood as a reference to financial
instruments
which fulfil the following criteria:

(b) appropriate information is available for them,

including
information which allows an appropriate assessment of
the
in such
instruments, taking into account paragraphs 2, 3 and 4 of
this Article;

related to the

investment

credit

risks

(c)

they are freely transferable.

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

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

(c)

the information referred to in point (a), verified by appro-
priately qualified third parties not subject to instructions
from the issuer;

(d) available and reliable statistics on the issue or the issuance

programme.

For money market

3.
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 the issuance programme or on
the legal and financial situation of the issuer prior to the
issue of the money market instrument;

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

(a)

they fulfil one of the criteria set out in Article 3(2) and all
the criteria set out in Article 4(1) and (2);

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

enabling

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For all money market instruments covered by the first
4.
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 by a central bank
from 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 the issuance programme or on
the legal and financial situation of
the issuer prior to the
issue of the money market instrument.

Article 6

Article 19(1)(h) of Directive 85/611/EEC

Establishment which is subject
to and complies with
prudential rules considered by the competent authorities
those laid down by
to be at

least as

stringent as
Community law

The reference in the third indent of Article 19(1)(h) of Directive
85/611/EEC to an establishment which is subject
to and
complies with prudential rules considered by the competent
authorities to be at least as stringent as those laid down by
Community law shall be understood as a reference to an
issuer which is subject to and complies with prudential rules
and fulfils one of the following criteria:

1.

it is located in the European Economic Area;

2.

it is located in the OECD countries belonging to the Group
of Ten;

Article 8

Articles 1(2) and 19(1)(g) of Directive 85/611/EEC

Liquid financial assets with respect to financial derivative
instruments

The reference in Article 1(2) of Directive 85/611/EEC to
1.
liquid financial assets shall be understood, with respect
to
financial derivative instruments, as a reference to financial deri-
vative instruments which fulfil the following criteria:

(a)

their underlyings consist in one or more of the following:

(i) assets as listed in Article 19(1) of Directive 85/611/EEC
instruments having one or several

including financial
characteristics of those assets;

(ii) interest rates;

(iii) foreign exchange rates or currencies;

(iv) financial indices;

(b) in the case of OTC derivatives,

they comply with the
in the second and third indents of

conditions set out
Article 19(1)(g) of Directive 85/611/EEC.

3.

it has at least investment grade rating;

Financial derivative instruments as referred to in Article
2.
19(1)(g) of Directive 85/611/EEC shall be taken to include
instruments which fulfil the following criteria:

4.

it can be demonstrated on the basis of an in-depth analysis
of the issuer that the prudential rules applicable to that issuer
are at least as stringent as those laid down by Community
law.

(a)

they allow the transfer of the credit risk of an asset as
referred to in point (a) of paragraph 1 of this Article inde-
pendently from the other risks associated with that asset;

Article 7

Article 19(1)(h) of Directive 85/611/EEC

Securitisation vehicles which benefit from a banking
liquidity line

The reference in the fourth indent of Article 19(1)(h) of
1.
Directive 85/611/EEC to securitisation vehicles
shall be
understood as a reference to structures, whether in corporate,
trust or contractual form, set up for the purpose of securiti-
sation operations.

The reference in the fourth indent of Article 19(1)(h) of
2.
Directive 85/611/EEC to banking liquidity lines
shall be
understood as a reference to banking facilities secured by a
financial
institution which itself complies with the third
indent of Article 19(1)(h) of Directive 85/611/EEC.

(b) they do not

result

in the transfer,
including in the form of cash, of assets other than those
referred to in Article 19(1) and (2) of Directive 85/611/EEC;

in the delivery or

(c)

they comply with the criteria for OTC-derivatives laid down
in the second and third indents of Article 19(1)(g) of
Directive 85/611/EEC and in paragraphs 3 and 4 of this
Article;

and by

the UCITS,

(d) their risks are adequately captured by the risk management
control
process of
mechanisms in the case of risks of asymmetry of infor-
mation between the UCITS and the counterparty to the
credit derivative resulting from potential access of the coun-
terparty to non-public information on firms the assets of
which are used as underlyings by credit derivatives.

internal

its

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For the purposes of the third indent of Article 19(1)(g) of
3.
Directive 85/611/EEC,
the reference to fair value shall be
understood as a reference to the amount for which an asset
could be exchanged, or a liability settled, between knowl-
edgeable, willing parties in an arm’s length transaction.

4.
For the purposes of the third indent of Article 19(1)(g) of
Directive 85/611/EEC, the reference to reliable and verifiable
valuation shall be understood as a reference to a valuation, by
the UCITS, corresponding to the fair value as referred to in
paragraph 3 of
this Article, which does not rely only on
market quotations by the counterparty and which fulfils the
following criteria:

component do not unduly influence the performance
of the whole index;

(ii) where the index is composed of assets referred to in
Article 19(1) of Directive 85/611/EEC, its composition
is at least diversified in accordance with Article 22a of
that Directive;

(iii) where the index is composed of assets other than those
referred to in Article 19(1) of Directive 85/611/EEC, it
to that
is diversified in a way which is equivalent
provided for in Article 22a of that Directive;

(a)

the basis for the valuation is either a reliable up-to-date
market value of the instrument, or, if such a value is not
available, a pricing model using an adequate recognised
methodology;

(b) they represent an adequate benchmark for the market to
which they refer, in that the following criteria are fulfilled:

(b) verification of the valuation is carried out by one of the

following:

(i) an appropriate third party which is independent from
the counterparty of the OTC-derivative, at an adequate
frequency and in such a way that the UCITS is able to
check it;

(ii) a unit within the UCITS which is independent from the
department in charge of managing the assets and which
is adequately equipped for such purpose.

The reference in Articles 1(2) and 19(1)(g) of Directive
5.
85/611/EEC to liquid financial assets shall be understood as
excluding derivatives on commodities.

Article 9

Article 19(1)(g) of Directive 85/611/EEC

Financial indices

The reference in point (g) of Article 19(1) of Directive
indices shall be understood as a

1.
85/611/EEC to financial
reference to indices which fulfil the following criteria:

(a)

they are sufficiently diversified, in that the following criteria
are fulfilled:

(i) the index is composed in such a way that price
one

movements

regarding

activities

trading

or

(i) the index measures the performance of a representative
group of underlyings in a relevant and appropriate way;

(ii) the index is revised or rebalanced periodically to ensure
that it continues to reflect the markets to which it refers
following criteria which are publicly available;

(iii) the underlyings are sufficiently liquid, which allows

users to replicate the index, if necessary;

(c)

they are published in an appropriate manner,
following criteria are fulfilled:

in that the

(i) their publication process relies on sound procedures to
collect prices and to calculate and to subsequently
publish the index value,
including pricing procedures
for components where a market price is not available;

rebalancing methodologies,

information on matters such as index calcu-
(ii) material
index changes or
lation,
any operational difficulties
in providing timely or
accurate information is provided on a wide and timely
basis.

2. Where the composition of assets which are used as under-
lyings by financial derivatives in accordance with Article 19(1)
of Directive 85/611/EEC does not fulfil the criteria set out in
paragraph 1 of this Article, those financial derivatives shall,
where they comply with the criteria set out in Article 8(1) of
this Directive, be regarded as financial derivatives on a combi-
nation of the assets referred to in points (i),
(ii) and (iii) of
Article 8(1)(a).

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Article 10

Article 21(3) of Directive 85/611/EEC, fourth subparagraph

(b) they are entered into for one or more of the following

specific aims:

Transferable securities and money market

instruments

embedding derivatives

(i) reduction of risk;

1.
The reference in the fourth subparagraph of Article 21(3)
of Directive 85/611/EEC to transferable securities embedding a
derivative shall be understood as a reference to financial
instruments which fulfil the criteria set out in Article 2(1) of
this Directive and which contain a component which fulfils the
following criteria:

(a) by virtue of that component some or all of the cash flows
that otherwise would be required by the transferable security
which functions as host contract can be modified according
instrument price,
to a specified interest
rates, credit
foreign exchange rate,
rating or credit
index, or other variable, and therefore
vary in a way similar to a stand-alone derivative;

rate,
financial
index of prices or

(b) its economic characteristics and risks are not closely related
the host

to the economic characteristics and risks of
contract;

(c)

it has a significant impact on the risk profile and pricing of
the transferable security.

2. Money market instruments which fulfil one of the criteria
set out in Article 3(2) and all the criteria set out in Article 4(1)
and (2) thereof and which contain a component which fulfils
this Article shall be
in paragraph 1 of
the criteria set out
regarded as money market instruments embedding a derivative.

A transferable security or a money market instrument
3.
shall not be regarded as embedding a derivative where it
contains a component which is contractually transferable inde-
pendently of the transferable security or the money market
instrument. Such a component shall be deemed to be a
separate financial instrument.

Article 11

Article 21(2) of Directive 85/611/EEC

Techniques and instruments for the purpose of efficient
portfolio management

1.
The reference in Article 21(2) of Directive 85/611/EEC to
techniques and instruments which relate to transferable secu-
rities and which are used for the purpose of efficient portfolio
management shall be understood as a reference to techniques
and instruments which fulfil the following criteria:

(ii) reduction of cost;

(iii) generation of additional capital or

the
UCITS with a level of risk which is consistent with
the risk profile of the UCITS and the risk diversification
rules laid down in Article 22 of Directive 85/611/EEC;

income for

(c)

their risks are adequately captured by the risk management
process of the UCITS.

2.
Techniques and instruments which comply with the
criteria set out in paragraph 1 and which relate to money
techniques and
market
instruments relating to money market
the
purpose of efficient portfolio management as referred to in
Article 21(2) of Directive 85/611/EEC.

instruments for

regarded as

instruments

shall be

Article 12

Article 22a(1) of Directive 85/611/EEC

Index replicating UCITS

1.
The reference in Article 22a(1) of Directive 85/611/EEC to
replicating the composition of a stock or debt securities index
shall be understood as a reference to replication of the compo-
sition of the underlying assets of the index, including the use of
derivatives or other techniques and instruments as referred to in
Article 21(2) of Directive 85/611/EEC and Article 11 of this
Directive.

The reference in the first

2.
indent of Article 22a(1) of
Directive 85/611/EEC to an index whose composition is
sufficiently diversified shall be understood as a reference to an
index which complies with the risk diversification rules of
Article 22a of that Directive.

The reference in the second indent of Article 22a(1) of
3.
Directive 85/611/EEC to an index which represents an adequate
benchmark shall be understood as a reference to an index
whose provider uses
recognised methodology which
generally does not result in the exclusion of a major issuer of
the market to which it refers.

a

4.
The reference in the third indent of Article 22a(1) of
Directive 85/611/EEC to an index which is published in an
appropriate manner shall be understood as a reference to an
index which fulfils the following criteria:

(a)

they are economically appropriate in that they are realised
in a cost-effective way;

(a)

it is accessible to the public;

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Official Journal of the European Union

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(b) the index provider is independent from the index-replicating

UCITS.

Point (b) shall not preclude index providers and the UCITS
the same economic group, provided that
forming part of
effective arrangements for
the management of conflicts of
interest are in place.

Article 13

Transposition

the latest,

1. Member States shall adopt and publish, by 23 March
2008 at
the laws, regulations and administrative
provisions necessary to comply with this Directive. They shall
forthwith communicate to the Commission the text of those
provisions and a correlation table between those provisions and
this Directive.

2. Member States shall communicate to the Commission the
text of the main provisions of national law which they adopt in
the field covered by this Directive.

Article 14

Entry into force

This Directive shall enter into force on the third day following
its publication in the Official Journal of the European Union.

Article 15

Addressees

This Directive is addressed to the Member States.

They shall apply those provisions from 23 July 2008.

Done at Brussels, 19 March 2007.

When Member States adopt those provisions, they shall contain
a reference to this Directive or be accompanied by such a
reference on the occasion of their official publication. Member
States shall determine how such reference is to be made.

For the Commission

Charlie McCREEVY
Member of the Commission