CSSF position regarding investment compliance rules in the context of the US shift to T+1 settlement

On 20 June 2024, the CSSF updated its FAQ on Circular 02/77 in order to provide clarification on the measures UCITS may take to avoid incurring investment breaches in the context of the US shift to T+1 settlement. 

By default, UCITS must comply at all times with the investment restrictions. However, due to the shorter settlement cycle in the US, UCITS may face, under certain circumstances, investment compliance issues concerning, inter alia: the deposit limit,1 ancillary liquid assets2 and the temporary borrowing limit.3 In this sense, for managing these timing gaps caused by the difference in the settlement cycles subject to a feasibility/impact assessment to be led by the UCITS and the consideration of investors’ interests, UCITS may put in place measures/tools, such as:  

• A shorter settlement cycle and/or extended settlement periods 
  • UCITS may shorten the settlement cycle of dealings in order to ensure a better alignment with the settlement cycle(s) applicable to the securities transactions they operate 
  • The settlement periods can also be extended, when possible (subject to SEC conditions) and in the best interest of investors 
• Cash sweep programs 
  • Cash balances are moved, at the end of the day, to other banks or are invested in cash-like instruments (e.g., MMFs) to ensure that the UCITS adheres to the 20% deposit limit per single body, respectively the 20% limit on ancillary liquid assets 
• Diversification of bank relationships 
  • Opening an additional bank account for the UCITS with another counterparty 
• Temporary borrowings
  • Subject to the limit of 10% as determined by the 2010 Law
  • May help the UCITS to bridge the timing gap between incoming payments from subscriptions and outgoing payments for related securities purchases 

UCITS should also consider the timing of the investments of the incoming payments from subscriptions in securities markets, considering elements, such as the settlement cycles, the subscription amounts, investment compliance, borrowing costs and dilution effects. 

The CSSF acknowledges that UCITS which have properly considered the possibilities given for managing timing gaps and the best interests of investors might, under certain exceptional circumstances, still face temporary breaches of investment restrictions that could reasonably not be avoided (passive breaches). These passive breaches are expected, in principle, to resolve themselves upon final settlement of the transactions. In the case of a passive breach, the UCITS must be able to justify the "passive" nature of the breach and document it appropriately. At the same time, the primary objective for its sales transactions should be to remedy the situation. 

In instances of an active breach, the requirements of CSSF Circular 02/774 apply. 

Ancillary assets

In this context, also on 20 June 2024, the CSSF updated its FAQ on 2010 Law in order to provide clarifications on the holding of ancillary liquid assets by UCITS. The CSSF reiterates that the holding of ancillary liquid assets is limited to 20% of the net assets of a UCITS, however it may be temporarily breached for a period of time strictly necessary when, because of exceptionally unfavorable market conditions or other exceptional circumstances, such breach is justified having regard to the interests of the investors. In addition, the CSSF clarified that bank deposits, MMIs and MMFs that meet the criteria of Article 41(1) of the 2010 Law qualify as eligible assets for a UCITS and, therefore, they cannot be included in the ancillary liquid assets.