Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

5. Limitations of Regulation and Alternative Solutions

two acceptances is that a legal definition involves most naturally a restriction of the eligible assets, whereas a contractual definition leaves the definition of eligible assets to be decided between the investment manager and the depositary. The attractiveness of secure UCITS is very much determined by legal and regulatory traditions Almost 59% of respondents agree that, on the whole, the existing complexity and internationalisation of UCITS funds may make it impossible to guarantee the restitution of assets at a reasonable cost. In this light, one could envisage creating the aforementioned subset of secure UCITS for which the depositary is — contractually or legally — unconditionally responsible for returning all assets that can be returned (financial derivatives cannot be). Of course, such insurance against restitution risk must come with restrictions, be they contractual or regulatory. More than 67% of respondents agree that this would be worth investigating. However, if securities are limited to European financial

securities that are admitted to central securities depositaries, a less significant 57% think that this secure subset is worth investigating. Forty-five percent favour the idea that secure UCITS would be the best way to clarify responsibilities between parties in the fund industry (12% disagree), and 38% agree that they would be the best way to allow clear-cut information of non-financial risks in funds (19% disagree, which means that a sizeable 43% are unsure). In terms of geography, this concept is the most appealing in France where UCITS have historically been the most secure because of very stringent depositary liability. Respondents, however, have very mixed views on the applicability of the proposed definition. First, there is a great proportion of “unsure” answers to each question, because the proposal is still not really fleshed out, many have commented (this in turns further justifies an in-depth investigation).

Figure 5.2.3: How much do you agree with the following statements?

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An EDHEC-Risk Institute Publication