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UCITS investment restrictions rules - the new definition of covered bonds applies to your future investments today

On 8 July 2022, the Covered Bonds Directive (Directive EU 2019/2162) and its implementing law in Luxembourg, the law of 8 December 2021 (the Covered Bonds Law) entered into force and will impact the eligibility of future covered bonds that can be invested up to 25% per single issuer. 

Under the previous rules set forth in article 43 (4) of the UCI Law, a UCITS could invest up to 25% of its assets in covered bonds issued by a single EU credit institution, which was subject by law to special public supervision designed to protect bondholders, provided that sums deriving from the issue of those bonds were invested in accordance with the law in assets which, during the full period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the case of the issuer’s bankruptcy, would be used on a priority basis for the payment of principal and accrued interest.

The Covered Bonds Directive harmonises the definition of covered bonds among the Member States and provides extensive criteria that must be met to qualify as such (eg secured by cover assets which must meet a number of conditions and to which bondholders must have direct recourse as preferred creditors). As a result, the Covered Bonds Law amends article 43 (4) of the UCI Law to provide essentially that:

  • covered bonds issued before 8 July 2022 that meet the previous requirements are unaffected by the new rules. They may remain in the UCITS’ portfolio until their maturity and be accounted for under the upper investment limit of 25%; and
  • as from 8 July 2022, only covered bonds that meet the Covered Bonds Directive criteria can benefit from the higher concentration limit of 25% of bonds in a single issuer.

UCITS should update their prospectus with the new investment restrictions and ensure that their investment managers and investment compliance monitoring teams are informed of the new criteria applicable to covered bonds. 

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