Central Bank of Ireland offers some reassurance to UCITS and Retail Investor AIFs in the event of a Hard Brexit

The Central Bank of Ireland’s (the Central Bank) Notice of Intention (the Notice of Intention) has provided guidance to UCITS and Retail Investor AIFs on the eligibility of investments and OTC counterparties in the event of the UK leaving the European Union (EU) on 29 March 2019 without a withdrawal agreement in place (a Hard Brexit).

Introduction

In a welcome move, the Central Bank’s Notice of Intention, “Investment by UCITS and Retail Investor AIFs in UK investment funds; Counterparties to OTC derivative instruments entered into by UCITS and Retail Investor AIFs” published on 07 March 2019, provides some reassurance to the Irish funds industry that, in the event of a Hard Brexit and pending a final decision, the Central Bank does not intend to adopt a default position prohibiting UCITS and Retail Investor AIFs from either (a) investing (subject to the relevant limits) in a UK investment fund or (b) entering into an OTC derivative with a UK investment firm.

The legal background

  1. Investing in an investment fund
    • Regulation 68 of the Irish UCITS Regulations permits UCITS to invest in alternative investment funds (AIFs) so long as - among other things - the AIF is subject to supervision which the Central Bank considers to be equivalent to that in the EU.
    • Chapter 1 of the Central Bank’s AIF Rulebook permits Retail Investor AIFs to invest in a regulated investment fund which is either a category 1 or a category 2 investment fund, as defined.
  2. Entering into an OTC derivative
    • By Regulation 8(3) of the UCITS Regulations, a UCITS can only enter into an OTC derivative if the counterparty falls within certain categories (which do not include a non-EEA investment firm).
    • Chapter 1 of the AIF Rulebook imposes a similar prohibition on Retail Investor AIFs.

The Central Bank’s guidance

If the UK leaves the EU on 29 March 2019 under a Hard Brexit, it will immediately become a third country.

Recognising that this could cause potential disruption, should such an eventuality arise, the Central Bank has given notice that it will consider:

  • Whether UK UCITS (which would become UK AIFs) should be identified as a category of investment fund in which UCITS and Retail Investor AIFs are permitted to invest.

    While this question is under consideration, the Central Bank would not propose to adopt a default position under which UK AIFs would be regarded as ineligible.

    Nevertheless, investment by a UCITS in a UK AIF must fall within with the UCITS’s aggregate limit of 30% for investments in all AIFs.

  • Whether a UK investment firm, which is currently authorised under MiFID, should be regarded as an eligible financial derivative counterparty for a UCITS and/or a Retail Investors AIF.

    Again, while this remains under consideration, the Central Bank would not propose to adopt a default position under which a UK investment firm would be treated as ineligible.

It should be noted that, in each of the above instances, the Central Bank’s determination as stated in the Notice of Intention “may be changed, including if circumstances change”.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.