Offshore 2 Offshore

* More Derivatives in EU Funds in Malta







European harmonised funds (UCITS) are increasingly investing in derivatives but this has so far not generated a higher level of risk in comparisonwith other funds, according to a survey published by the European Commission. The study, carried out by PriceWaterhouseCoopers, shows that the portfolios of UCITS funds (Undertakings for Collective Investment in Transferable Securities) are increasingly made up of products such as futures, options, swaps and other derivatives. In 2006, futureswere present in 31 per cent of the collective investment funds surveyed, compared to 18 percent registered in 2002. Options, which remain the main derivatives in terms ofweight in net assets (40 per cent of the total), increased their presence from 14 per cent ofUCITS in 2002 to 20 per cent in 2006. In the same period, swaps passed from 1 per cent to 12 per cent. The changes in the presence of derivatives were registered both before and after the entry into force in 2004 of theUCITS III Directive which further regulates themarket for harmonised collective funds in Europe, allowing their managers to invest in awider range of assets. “The study confirms the increasing use ofwider investment powers by UCITS III managers. It shows that the UCITS framework provides a very flexible environment and allows managers to implement innovative strategies,” Mr McCreevy underlined.

This does not appear to have led to an increased risk exposure, although the sub-prime crisis highlighted the liquidity issues facing UCITS funds, which according to EU rules are obliged to take into account their own liquidity requirements in order to be able to meet redemption requests from shareholders at any time. However, acknowledging the additional risks linked to leverage and valuation, the study concludes that “such potential risks did not impact the performance/risk profile forinvestors”.

It emerged thatUCITS fund managerswere decisive in keeping risk at low levels. “Asset managers are usually prudent before investing in new and complex instruments”, underlines the report, adding that they “prefer to delay the launch of new products instead of having a fund without proper risk management and valuation procedures”.

The report also focused on nonharmonised funds such as hedge funds. Financial services industry representatives, in a press release, repeated their commitment “towork closely together andwith other interested stakeholders to make timely improvements” in transparency and disclosure in the European securitisation market.