March 2008
NEW RULES ON COLLECTIVE INVESTMENT
SCHEMES (“CIS”) INVESTMENTS IN DERIVATIVES AND OTHER INSTRUMENTS (ORDER
888/2008)
1. KEY
INNOVATIONS IN RELATION TO DERIVATIVES (More
information)
1.1. General view.
(More information)
1.2. Suitable derivatives (sophisticated
and unsophisticated).
(More information)
1.3. New underlying assets.
(More information)
1.4. Purposes. (More
information)
1.5. Specific requirements relating to
credit, financial indexes and
volatility derivatives and other rules. (More
information)
2. DEFINITIONS AS REGARDS THE INVESTMENT
RULES (More information)
NEW RULES ON COLLECTIVE
INVESTMENT SCHEMES (“CIS”) INVESTMENTS IN DERIVATIVES AND OTHER
INSTRUMENTS (ORDER 888/2008)
On 2 April 2008, Ministerial Order 888/2008 of 27 March (the “Order”)
on transactions by financial collective investment schemes involving
financial derivative instruments, which clarifies some terms of the
Regulation of Law 35/2003 of 4 November on collective investment schemes
(the “RIIC”), was published in the Official Spanish Gazette (“Boletín
Oficial del Estado”). The Order entered into force on the first day
following its publication.
The Order develops the RIIC rules on investment in derivatives by CIS,
departing from the former Ministerial Order of 10 June 1997 and
transposing into Spanish law Commission Directive 2007/16/EC of 19 March.
The Order does not apply to free investment CIS, which enjoy a more
flexible regime.
The Order clearly entails a key milestone for the increase in
flexibility of the investment framework for Spanish financial CIS, which
in some respects surpasses the harmonised European rules (UCITS).
In view of the significance of this Order, we believed it would be
interesting to conduct a brief and urgent analysis of the Order in order
to highlight its main innovations.
1. KEY INNOVATIONS IN RELATION TO DERIVATIVES
1.1. General view.
The Order’s new rules on investment in derivatives are complex and
very technical, depending mainly on how the investment’s valuation is
carried out and how its market risk is measured.
In any event, these rules considerably widen the scope of
derivatives and underlying assets considered to be suitable, and
substantially liberalise the use of OTC derivatives by CIS for
investment purposes.
1.2. Suitable derivatives (sophisticated
and unsophisticated).
The Order broadens the possibilities for considering derivatives as
suitable for investment by CIS, and classifies them as
sophisticated and unsophisticated.
The Order no longer employs the method of enumerating types of
derivatives and underlying assets. The suitability and classification
of a derivative does not depend on whether it is listed in an
organised market or trading system, but rather, essentially, on the
type of derivative involved, and on compliance with some requirements
regarding its valuation and market risk measurement. Derivatives that
typically meet these requirements regarding their valuation and market
risk measurements are considered to be unsophisticated, and CIS have
broad freedom to invest in them. Those derivatives not complying with
these requirements are subject to special restrictions.
The CNMV may allow the use of other derivatives and determine their
character as sophisticated or unsophisticated, and either of a general
or particular nature.
According to the Order, CIS are not permitted to enter into other
derivatives in isolation, nor as incorporated into financial
instruments or securities. Repos and simultaneous transactions are not
considered to be derivatives under the terms of this Order.
1.3. New underlying assets.
The Order permits the following as new underlying assets:
a) New financial indexes (which
comply with the terms of the Order, such as commodities indexes).
b) Commodities for which
there is a trading market.
c) Shares and units of free
investment CIS and foreign entities similar to those provided for in
article 36.1.j of the RIIC.
d) Inflation, subject to
compliance with some conditions.
e) Any combination of the
abovementioned assets or those permitted by the CNMV.
The liquidation of derivatives can never result in an acquisition
of a non-financial asset by the CIS.
1.4. Purposes.
The Order allows for CIS investment in unsophisticated derivatives
or in securities and instruments that incorporate them for purposes of
hedging or as investments for more efficient portfolio management.
Therefore, unsophisticated OTC derivatives can be used for
investment purposes.
Regarding sophisticated derivatives, the Order allows for the use
of derivatives for hedging and investment purposes. However, it limits
the use of sophisticated derivatives for the purpose of investment for
more efficient portfolio management to the following cases:
a) When traded in a market
where a daily market price resulting from the sale and purchase
transactions made by third parties is disseminated.
b) Securities or instruments
that secure the principal.
c) When used in the framework
of particular profit-oriented management (guaranteed funds).
1.5. Specific requirements relating to
credit, financial indexes and volatility derivatives and other rules.
The Order establishes specific requirements regarding each of these
derivatives types. In addition, it provides specific requirements for
OTC derivatives, general limits on the use of market risk and
counterparty risk derivatives, the positions’ valuation and internal
control duties, and the systems for supervision and for the informing
of shareholders and unitholders.
2. DEFINITIONS AS REGARDS THE INVESTMENT RULES
In addition to the rules on derivatives explained above, this Order
transposes into Spanish law Commission Directive 2007/16/EC of 19 March.
This Directive also positively impacts the Spanish investment rules by
adding several definitions that make the rules more flexible. In
particular, a new definition of transferable securities is added which
will allow, amongst other things, the application as suitability
criteria of Articles 36.1 a) and 36.1.b) RIIC related to transferable
securities admitted or pending to be admitted to quotation to closed-end
CIS that comply with some requirements instead of the special rule
applicable to non-harmonised CIS (36.1.d) del RIIC) as it had been the
situation until now.
