Irish funds told to expect enhanced scrutiny of complex investments

The Central Bank of Ireland (CBI) has updated its Q&A guidance (28-page / 673KB PDF) for UCITS funds to reflect its position in relation to investments in CFDs, collateralised loan obligations (CLOs), contingent convertible securities (CoCos) and binary options. However, it has not gone as far as to rule out investment by Irish UCITS funds in these products.

The guidance reminds funds that UCITS are intended to be suitable for retail investors. Fund managers are therefore required to put appropriate risk management processes in place, and to regularly 'stress test' for liquidity risk against potential changes in market conditions.

Funds proposing to invest in CFDs, CLOs, CoCos or binary options will be expected to provide sufficient detail of their plans at the authorisation stage to "enable the Central Bank to make an informed judgment with respect to the particular application involved", according to the guidance. The CBI may review the fund's overall model portfolio, the due diligence it has carried out in respect of that portfolio and evidence of suitability of that portfolio, bearing in mind the regulatory requirements, it said.

The marketing of CFDs, binary options and similar products directly to retail investors is restricted by both EU and Irish regulators.

Investment funds expert Aongus McCarthy of Pinsent Masons, the law firm behind Out-Law, said: "Investment managers wishing to include CFDs, CLOs, CoCos or binary options as part of their portfolio universe for new UCITS products will need to be conscious of the enhanced scrutiny proposed to be applied by the Central Bank and the impact that this may have on the authorisation timeline".