The Central Bank UCITS Regulations provide that the investments of a UCITS shall comprise inter alia transferable securities and money market instruments admitted to official listing on a stock exchange in a third country or dealt in on another regulated market in a third country which operates regularly and is recognised and open to the public provided that the choice of stock exchange or market is provided for in the fund rules or the instruments of incorporation of the investment company.
Regulation 28 of the Central Bank UCITS Regulations requires a responsible person to include a list of the stock exchanges, markets and regulated derivatives markets in which the UCITS may invest in the constitutional document of the UCITS.
UCITS Permitted Markets
Under the Central Bank of Ireland UCITS Regulation 2019, a responsible person shall regularly review the list of stock exchanges and regulated markets that are specified in the prospectus of the relevant UCITS. This must be done to ensure that those stock exchanges and regulated markets continue to meet with the regulatory criteria.
Additionally, a responsible person shall consult with the depositary to ensure that adequate custody arrangements are in place before including additional stock exchanges or markets in the prospectus.
In respect of a relevant market, the regulatory criteria to which the responsible person shall have regard includes a general overview of the market, having regard to issues which would be relevant to the operation of the market and investments therein; and whether the relevant market displays any or each of the following characteristics:
Regulated
The market must be regulated – this means that the market must be subject to supervision by an authority or authorities, duly appointed or recognised by the state in which it is located.
The authority(ies) should generally have the power to:
- Impose capital adequacy rules,
- To supervise directly members of the market,
- To impose listing standards,
- To ensure transparency in dealings and to impose penalties where breaches of rules or standards occur.
Additionally, the clearance and settlement system for transactions should also be regulated and should have acceptable settlement periods.
Recognised
The market must also be recognised or registered by an authority or authorities, duly appointed or recognised by the state in which it is located.
Investment in the market by locally based retail investment funds should be permitted by the relevant authorities.
Operating Regularly
The market must also operate regulatory. When accessing this requirement, a responsible person must ensure that
- Trading takes place with reasonable frequency; and
- The market should have regular trading hours.
Additionally, the assessment must have regard to:
- The liquidity in the market, including the number of members/participants, and
- The ability of the market to provide fair prices on an on-going basis.
Custody arrangements should also be satisfactory, i.e. a depositary must be satisfied that it can provide for the safe-keeping of the assets of an authorised UCITS in accordance with the conditions set down in the UCITS Regulations.
Open to the Public
The market must be open to the public. In order to meet this requirement, the public should have direct or indirect access to the securities traded on the market.
Furthermore, the degree to which overseas investors are permitted to invest and any rules which may impede the repatriation of capital or profits must be taken into account.
Authorisation Process
As part of the authorisation process for a UCITS, a responsible person should confirm to the Central Bank, in writing, that each stock exchange and market listed in the prospectus, or which will be listed in the prospectus in the future, is regulated, operates regularly, is recognised and open to the public.
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