Investment managers operating within the UCITS framework are under increasing pressure to identify new sources of alpha, yet the eligibility rules governing what these funds can invest in remain a significant constraint — particularly when it comes to more complex instruments such as structured debt securities issued by special purpose vehicles (SPVs).
RegTech company Zeidler Group recently delved into UCITS eligibility.
Under Article 50(1) of Directive 2009/65/EC, known as the UCITS Directive, funds are permitted to invest only in certain defined asset classes. Any proposed investment must fall within one of the categories listed under Article 50(1)-(2) to qualify as eligible. Directive 2007/16/EC, the Eligible Assets Directive, provides further clarification on these requirements. Whilst the framework may appear relatively clear-cut in principle, the practical analysis for instruments such as structured notes demands a detailed, multi-layered legal and regulatory assessment conducted on a case-by-case basis — one that must account for the fund’s strategy, liquidity profile, risk management processes and disclosure obligations.
Legal and regulatory advisory firm Zeidler Group has observed that many investment managers find this eligibility assessment process excessively burdensome. As a result, a number of UCITS are simply being blocked from investing in more complex asset classes altogether, cutting off what could be a meaningful source of returns for those funds.
To illustrate the complexity involved, Zeidler recently advised a client on a UCITS investing in notes issued by a Luxembourg SPV under a secured note issuance programme. Beyond conducting the legal and regulatory eligibility assessment, the firm also delivered a risk-based review and flagged a range of initial and ongoing considerations, equipping the client to make a fully informed and holistic decision on whether to permit the UCITS to invest in those instruments.
The case underscores a broader point: UCITS eligibility is rarely a straightforward tick-box exercise. This is especially true when dealing with structured instruments that carry embedded derivative components or bespoke issuance structures. Each investment must be evaluated both against the UCITS regulatory framework and the fund’s own operational and strategic parameters.
Zeidler offers tailored eligibility assessments across a wide range of asset types, providing the case-by-case analysis that investment managers require to navigate this complex landscape with confidence.
For more insights, read the full story here.
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