What may a UCITS invest in, and what limits apply?

The list is closed. First, transferable securities and money market instruments dealt on an EU regulated market, or on a third-country market that is on the list the Minister of Finance approves on CySEC's proposal or is named in the fund rules. Second, recent issues, if their terms include an undertaking to seek admission and admission follows within 1 year. Third, units of UCITS, and of other funds that are equivalently supervised and protective and report half-yearly and annually, if the target may hold no more than 10% in other funds. Fourth, deposits with an EU or equivalently supervised bank that are repayable on demand or can be withdrawn, and that mature in no more than 12 months. Fifth, derivatives on eligible instruments, financial indices, interest rates, exchange rates or currencies, with OTC counterparties in categories CySEC approves and reliable daily valuation. Last, certain regulated unlisted money market instruments. The exam material says less than 12 months for deposits. The Law has said no more than 12 months since 2012.

Up to 10% may go into securities or money market instruments outside the list, but precious metals and certificates over them are banned. The risk process must measure each position's contribution to overall risk at any time, may not rely solely or mechanically on credit ratings, and must value OTC derivatives accurately and independently. Global exposure to derivatives may not exceed the portfolio's total net value. If a securitisation held stops meeting Regulation (EU) 2017/2402, the manager takes any corrective action needed in investors' best interest.

The basic limit is 10% of assets in one issuer's securities and money market instruments, and holdings above 5% may total no more than 40%. It rises to 35% for paper issued or guaranteed by Member States and their local authorities, third countries, or public international bodies that include a Member State. For such issuers it can reach 100% if CySEC considers unitholders equally protected, the fund holds at least 6 issues with none above 30%, the rules name the issuers above 35%, and the prospectus, the key investor document (the PRIIPs KID for retail UCITS since 1 January 2023) and marketing communications say so prominently.

The exam material applies a 25% limit to bonds of any regulated credit institution in a Member State. The Law has never gone that far. Since 2012 the 25% has covered only bank bonds under special public supervision, backed by cover assets that bondholders have first call on. Since 8 July 2022, Law 134(I)/2021 has limited it to covered bonds under Directive (EU) 2019/2162, and to bonds issued before that date that met the old conditions. An ordinary bank bond stays at 10%. Such holdings above 5% may total 80%, and holdings under the 25% and 35% limits sit outside the 40%.

Deposits with one body are capped at 20%, and OTC derivative exposure to one counterparty at 10% of assets for an eligible credit institution, or 5% otherwise. Securities of, deposits with and OTC exposure to one body may together reach 20%, and stacking can never take exposure to one body beyond 35%. A group counts as one body, and its securities may be combined up to 20%. An index-tracking UCITS may hold 20% per issuer, or 35% for one issuer in exceptional markets, if the index is diversified, representative and properly published.

Up to 20% of assets may go into any single fund, and funds that are not UCITS may not exceed 30% in total. The exam material treats 30% as a cap on all fund units together; the Law has applied it only to non-UCITS funds since 2012. No subscription or redemption fees may be charged where the target is run by the same or a linked management company, and a fund investing substantially in others discloses the maximum management fees at both levels.

Units may trade on an exchange if they trade all day, the UCITS itself holds a licence, at least one market maker keeps the price close to NAV, and the fund's assets are fully with the depositary before trading starts. The exam material words the second and fourth conditions as the UCITS being authorised to trade and the units' particulars reaching the depositary. The Law has used its present wording since 16 June 2015, when Law 88(I)/2015 replaced a narrower rule for index-tracking funds. Secondary-market buyers generally cannot sell units back to the fund, unless the market price departs significantly from NAV. A guarantee of capital or return may come from a credit institution established in Cyprus, never from the depositary or another custody provider of the fund.

A management company, across all its common funds, and a VCIC may not buy voting shares giving significant influence over an issuer's management. A UCITS may hold at most 10% of an issuer's non-voting shares, debt securities or money market instruments, and 25% of one fund's units; public issuers are exempt. Exercising subscription rights is not a breach at the time, and a newly licensed UCITS may depart from the spreading limits for 6 months while still spreading risk. If a limit is exceeded for reasons beyond the fund's control, or through subscription rights, remedying it must be a priority objective of its sales, in unitholders' interests. The exam material puts this as remedying it as soon as possible.