Circular 3/2011 of the National Securities Market Commission modifying Circular 1/2009 on collective investment scheme categories based on investment focus

OFFICIAL STATE BULLETIN No. 152 Monday, June 27, 2011 Sec. I. Page 68369 I. GENERAL PROVISIONS NATIONAL SECURITIES MARKET COMMISSION 11011 Circular 3/2011, of June 9, of the National Securities Market Commission, by which Circular 1/2009, of February 4, on the categories of collective investment institutions according to their investment focus is partially modified.

Article 30.2 of Law 35/2003, of November 4, on Collective Investment Institutions (hereinafter, LIIC), determines that, for statistical purposes and to facilitate information on their risk profile and the assets in which they invest, the CNMV will establish categories of collective investment institutions (hereinafter, CIS) based on the investment focus of these within the assets provided for in Article 30 of the LIIC. With Circular 1/2009, of February 4, of the National Securities Market Commission, on the categories of CIS based on their investment focus, compliance with this provision was achieved.

In Circular 1/2009, the investment focuses were defined based on certain investment percentages in terms of net assets. With the modification of said Circular, it is clarified that, for the calculation of the investment percentages of fixed income and equity of the investment focuses, both cash investments and derivatives will be taken into account, that is, the total exposure of the fund. Likewise, investments in equity securities issued by entities established outside the euro area and exchange rate risk will also be considered in terms of total exposure.

Additionally, the work developed by the Committee of European Securities Regulators (CESR), currently replaced by the European Securities and Markets Authority (ESMA), has been incorporated, under level 3 implementation criteria regarding a harmonized definition of money market funds (CESR/10-049), in order to achieve a higher level of investor protection. As a consequence of the new definition of money market funds, the annex of Circular 1/2009, which contains the definition of the monetary focus, is modified.

The work of CESR also refers to other aspects of money market funds, including the possibility of valuing them at amortized cost. However, it should be noted that Circular 1/2009, now modified, does not refer to asset valuation rules for CIS and that valuation at amortized cost presents significant fairness issues among participants. All of this advises against modifying the valuation regime of Circular 3/2008.

Likewise, due to the modification of Article 49 of the Regulation of Law 35/2003, of November 4, on Collective Investment Institutions, by Royal Decree 749/2010, of June 7, the types of CIS are modified for the purposes of defining CIS categories in the second provision of Circular 1/2009, regarding listed funds becoming listed CIS, as well as in the definition of the passive management focus of CIS in the annex of Circular 1/2009.

For all the above, and under the direct authorization conferred on the National Securities Market Commission in paragraph 2 of Article 30 of the LIIC and after the report of the Advisory Committee, this Circular modifies Circular 1/2009, of February 4, on the categories of CIS based on their investment focus.

In virtue thereof, the Council of the National Securities Market Commission, in accordance with the Council of State, in its meeting of June 9, 2011, has ordered:

First Provision. Definition of CIS categories. The second provision of Circular 1/2009, of February 4, of the National Securities Market Commission, on the categories of institutions of collective investment based on their investment focus is modified, which shall read as follows:

"A category of a CIS, for the purposes of this Circular, is defined as the union of the type and the investment focus of the CIS. The following shall be considered as different types of CIS, in addition to ordinary funds and investment companies: subordinate CIS, CIS that invest predominantly in other CIS, CIS that replicate or reproduce a specific stock or fixed income index, and listed CIS regulated in Article 49 of Royal Decree 1309/2005, of November 4 (hereinafter, RIIC). The investment focuses of CIS shall be those established in the Annex of this Circular."

Second Provision. Criteria for determining and disclosing to investors the investment focuses of CIS. Subparagraph h) of the third provision of Circular 1/2009, of February 4, of the National Securities Market Commission, on the categories of institutions of collective investment based on their investment focus is modified, which shall read as follows:

"To calculate the investment percentages that define the different investment focuses, the total exposure of the CIS is considered as the calculation base. Total exposure is understood as the sum of the exposure achieved by the CIS through its investments in cash financial instruments and derivatives. For the calculation of exposure with derivative instruments, the commitment methodology set out in Circular 6/2010, of December 21, of the CNMV, on transactions with derivative instruments of collective investment institutions, shall be applied. For the sole purpose of determining investment focuses, it is considered that no additional exposure is generated for the CIS when investments in cash or derivative financial instruments do not expose the CIS to additional risks, among others interest rate and credit risks, so they must correspond, among others, to public debt issuances issued by a State that meets the requirements established in Article 38.2(b) of the RIIC or temporary acquisitions of said assets, in both cases with a maturity of less than 3 months and presenting in any case the issuer with high credit quality."

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ANNEX The annex of Circular 1/2009, of February 4, of the National Securities Market Commission, on the categories of collective investment institutions based on their investment focus is modified, which shall read as follows:

"Investment Focuses Focus Definition Short-term Money Market. Absence of total exposure to equity, exchange rate risk, and commodities. Objective to maintain principal and obtain a return consistent with money market rates. Investment in money market instruments and deposits that comply with Article 36.1 a), e) and h) of the RIIC and Article 16 of Order EHA/888/2008 on derivatives as well as in other CIS that meet the definition of short-term money market. Must accept subscriptions and redemptions of shares daily. Portfolio duration equal to or less than 60 days1. Portfolio maturity equal to or less than 120 days2. Residual legal maturity of assets equal to or less than 397 days. High quality at the discretion of the manager taking into account, at least: credit quality of the asset (if any), type of asset, counterparty and operational risk in structured financial instruments and liquidity profile of the assets. For the purposes of asset credit quality: absence of exposure to assets with short-term credit rating lower than A23 or if it has no specific credit rating by any recognized agency, equivalent quality at the discretion of the manager. Money Market. Absence of total exposure to equity, exchange rate risk, and commodities. Objective to maintain principal and obtain a return consistent with money market rates. Investment in money market instruments and deposits that comply with Article 36.1 a), e) and h) of the RIIC and Article 16 of Order EHA/888/2008 on derivatives as well as in other CIS that meet the definition of short-term money market or money market. Must accept subscriptions and redemptions of shares daily. Portfolio duration equal to or less than 6 months4. Portfolio maturity equal to or less than 12 months5. Residual legal maturity of assets equal to or less than 2 years provided that the term for interest rate review is equal to or less than 397 days6. High quality at the discretion of the manager taking into account, at least: credit quality of the asset (if any), type of asset, counterparty and operational risk in structured financial instruments and liquidity profile of the assets. For the purposes of asset credit quality: absence of exposure to assets with short-term credit rating lower than A27 or if it has no specific credit rating by any recognized agency, equivalent quality at the discretion of the manager. As an exception to the above, they may have exposure to sovereign debt with a minimum credit rating of BBB-8. Euro Fixed Income. Absence of total exposure to equity, having not been classified within the money market focuses. Maximum of 10% of total exposure in exchange rate risk. International Fixed Income. Absence of total exposure to equity. Possibility of having more than 10% of total exposure in exchange rate risk. Mixed Euro Fixed Income. Less than 30% of total exposure in equity. The sum of investments in equity securities issued by entities established outside the euro area, plus exposure to exchange rate risk, will not exceed 30%. Mixed International Fixed Income. Less than 30% of total exposure in equity. The sum of investments in equity securities issued by entities established outside the euro area, plus exposure to exchange rate risk, may exceed 30%. Mixed Euro Equity. Between 30% and 75% of total exposure in equity. The sum of investments in equity securities issued by entities established outside the euro area, plus exposure to exchange rate risk, will not exceed 30%. Mixed International Equity. Between 30% and 75% of total exposure in equity. The sum of investments in equity securities issued by entities established outside the euro area, plus exposure to exchange rate risk, may exceed 30%. Euro Equity. More than 75% of total exposure in equity. At least 60% of total exposure in equity issued by entities established in the euro area. Maximum of 30% of total exposure in exchange rate risk.

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Focus Definition International Equity. More than 75% of total exposure in equity, having not been classified as Euro equity. Passive Management CIS. CIS that replicate or reproduce an index, including listed CIS of Article 49 of the RIIC, as well as CIS with a specific objective of non-guaranteed return. Guaranteed Fixed Return. CIS for which there is a third-party guarantee that ensures the investment plus a fixed return. Guaranteed Variable Return. CIS with the guarantee of a third party that ensures the recovery of the initial investment plus a possible amount totally or partially linked to the evolution of equity instruments, currency, or any other asset. It also includes any CIS with the guarantee of a third party that ensures the recovery of the initial investment and performs active management of part of the assets. Partial Guarantee. CIS with a specific return objective at maturity, linked to the evolution of equity instruments, currency, or any other asset, for which there is a third-party guarantee that ensures the recovery of a percentage lower than 100% of the initial investment. It also includes any CIS with the guarantee of a third party that ensures the recovery of a percentage lower than 100% of the initial investment and performs active management of part of the assets. Absolute Return. CIS that sets as a management objective, non-guaranteed, to achieve a specific periodic return/risk. To this end, it follows absolute value techniques, "relative value", dynamic techniques... Global. CIS whose investment policy does not fit into any of the focuses mentioned above.

1 Duration in bonds with variable coupons is calculated by counting only the period until the next review. 2 The legal maturity of the asset will be taken into account for its calculation. However, in those financial instruments that incorporate a put option, the exercise date can be used instead of the legal maturity of the asset if it is met: the option is exercisable by the manager, the exercise price is similar to the value of the instrument on the exercise date, and the investment strategy of the CIS implies a high probability that the option will be exercised at that time. 3 A2 by S&P or equivalent by all agencies that have rated the asset. 4 Duration in bonds with variable coupons is calculated by counting only the period until the next review. 5 The legal maturity of the asset will be taken into account for its calculation. However, in those financial instruments that incorporate a put option, the exercise date can be used instead of the legal maturity of the asset if it is met: the option is exercisable by the manager, the exercise price is similar to the value of the instrument on the exercise date, and the investment strategy of the CIS implies a high probability that the option will be exercised at that time. 6 Bonds with variable coupons will have as a reference an interest rate or money market index. 7 A2 by S&P or equivalent by all agencies that have rated the asset. 8 BBB- by S&P or equivalent by one or more recognized agencies. Sovereign debt is understood as money market instruments issued or guaranteed by a local, regional, or central authority, central bank of any member state, the European Central Bank, the EU, or the European Investment Bank."

Transitory Provision.

1. From the date of entry into force of this Circular, CIS must express their investment policy in accordance with the new wording of subparagraph h) of the Third Provision of Circular 1/2009 of February 4, of the National Securities Market Commission. The adaptation of the existing CIS prospectuses to the date of entry into force will occur as the Management Companies (SGIIC) or investment companies request the update of the prospectus for any other reason and within a maximum period of 2 years.
2. However, in CIS with mixed equity or equity focus, if as a consequence of expressing their investment policy in these terms their focus were modified, they must update their prospectus within 6 months, with Article 14.2 of the RIIC being applicable.

Final Provision. This Circular shall enter into force two months after its publication in the "Official State Bulletin". Madrid, June 9, 2011.–The President of the National Securities Market Commission, Julio Segura Sánchez. cve: BOE-A-2011-11011 http://www.boe.es OFFICIAL STATE BULLETIN D. L.: M-1/1958 - ISSN: 0212-033X