Status and Issues of Harmonization with UCITS IV.

in Hungary

Status and Issues of Harmonization with UCITS IV.

in Hungary

Andras TemmelSecretary General

Andras TemmelSecretary General

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Historical backgroundHistorical background

I. The start: First investment fund act in 1991.»Relatively simple regulation, based on UCITS I. and different national laws»Weak organizational requirements for management companies, but very strict investment rules and limits for funds»No regulation of derivatives, plain vanilla products»Golden age for domestic bond funds (20-30% yield, 75-85% market share)»Typical Man. Company at the end of 90’s: 5-8 funds, 5-8 employees»Size of the market: 4-5% of household savings»Funds are supplementary banking products

I. The start: First investment fund act in 1991.»Relatively simple regulation, based on UCITS I. and different national laws»Weak organizational requirements for management companies, but very strict investment rules and limits for funds»No regulation of derivatives, plain vanilla products»Golden age for domestic bond funds (20-30% yield, 75-85% market share)»Typical Man. Company at the end of 90’s: 5-8 funds, 5-8 employees»Size of the market: 4-5% of household savings»Funds are supplementary banking products

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Historical backgroundHistorical backgroundII. Big step forward: New law in 2001.

»Change in regulatory philosophy: stricter organizational requirements for management companies, much wider investment limits for funds»New fund types: index tracker, fund of funds, „derivative” funds, guaranteed funds, open ended real-estate funds»Introduction of „European” UCITS fund, but kept the structure of the old act, parallel regulation for „domestic” UCITS (=public, open ended, securities) funds, which remained the basic type of funds – with broader investment limits»Golden age for product development, dramatic change in fund range and in market structure»New activity: discretional portfolio management – now 60% of total AUM»Typical Man. Company at the end of the decade: 20-30 funds, 15-25 employees»Size of the market: 8-10% of household savings»Foreign UCITS funds: 10-15% of the retail market (unit linked, private bank)

II. Big step forward: New law in 2001.

»Change in regulatory philosophy: stricter organizational requirements for management companies, much wider investment limits for funds»New fund types: index tracker, fund of funds, „derivative” funds, guaranteed funds, open ended real-estate funds»Introduction of „European” UCITS fund, but kept the structure of the old act, parallel regulation for „domestic” UCITS (=public, open ended, securities) funds, which remained the basic type of funds – with broader investment limits»Golden age for product development, dramatic change in fund range and in market structure»New activity: discretional portfolio management – now 60% of total AUM»Typical Man. Company at the end of the decade: 20-30 funds, 15-25 employees»Size of the market: 8-10% of household savings»Foreign UCITS funds: 10-15% of the retail market (unit linked, private bank)

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Market shares of different fund typesMarket shares of different fund types

  

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31.12.2001 30.09.2011Traditional funds, of which: 99% 64%

Money market 18% 35%Bond 72% 10%

Balanced 2% 3%Equity 7% 16%

New type of funds, of which: 1% 36%Guaranteed 0% 11%

"Derivative", absolut return, commodity etc.. 0% 4%Real estate 1% 12%

Fund of Funds 0% 9%

Implementation of UCITS IV –complete revisionImplementation of UCITS IV –complete revision

I. The process:»Preparations have begun in mid 2008 – revision of investment rules of open end real estate funds»Later: lessons of the crisis, UCITS IV»New phase begun in 2010, suspended because of EU Presidency, adoption of the new act is still in progress, vote probably in December

II. Strategic goals: »keep the existing fund range and the parallel regulation for „domestic” and „European” UCITS; »keep the flexible investment limits for „domestic” UCITS: liquidity funds (no limit on bank deposits), equity funds (15% for liquid stocks), “derivative” funds (more flexible limits for maximum leverage)»broaden the activity of fund man. companies (direct distribution of fund units for retail investors; management of all kind of collective investment schemes)»UCITS compliant structure of the regulation: the Directive will the basis of the law, „European” UCITS will be the basic fund type, all other organizational and operational rules should be directly derived from the Directive

I. The process:»Preparations have begun in mid 2008 – revision of investment rules of open end real estate funds»Later: lessons of the crisis, UCITS IV»New phase begun in 2010, suspended because of EU Presidency, adoption of the new act is still in progress, vote probably in December

II. Strategic goals: »keep the existing fund range and the parallel regulation for „domestic” and „European” UCITS; »keep the flexible investment limits for „domestic” UCITS: liquidity funds (no limit on bank deposits), equity funds (15% for liquid stocks), “derivative” funds (more flexible limits for maximum leverage)»broaden the activity of fund man. companies (direct distribution of fund units for retail investors; management of all kind of collective investment schemes)»UCITS compliant structure of the regulation: the Directive will the basis of the law, „European” UCITS will be the basic fund type, all other organizational and operational rules should be directly derived from the Directive

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Implementation of UCITS IV –complete revisionImplementation of UCITS IV –complete revision

III. Other impact of UCITS IV:»Introduction of the KID, and the new merger rules for all kind of public funds.»But master-feeder regulation only for “European” type UCITS – for domestic fund of funds the much simple ‘old’ regulation will be kept

IV. Important technical changes – lessons of the crisis: »Flexible regulation for redemption periods»Tools for handling liquidity problems (longer suspension period, segregation of illiquid assets)»Complete revision of real estate fund regulation

V. Problems with the implementation:»Unexpected debate with lawyers about the interpretation of Annex II. of the Directive. What does it mean: „the regular business of a management company shall include the functions referred to in Annex II.”? (Art. 2. par. 2.) Is it compulsory to maintain the unit-holder register? Will it be compulsory to ‘market’ (=distribute) the units? ‘Hardcore’ interpretation could have dramatic impact on the functioning of the whole market.»Operational and organizational requirements for non UCITS management companies»KID: technical problems (length, wording)

III. Other impact of UCITS IV:»Introduction of the KID, and the new merger rules for all kind of public funds.»But master-feeder regulation only for “European” type UCITS – for domestic fund of funds the much simple ‘old’ regulation will be kept

IV. Important technical changes – lessons of the crisis: »Flexible regulation for redemption periods»Tools for handling liquidity problems (longer suspension period, segregation of illiquid assets)»Complete revision of real estate fund regulation

V. Problems with the implementation:»Unexpected debate with lawyers about the interpretation of Annex II. of the Directive. What does it mean: „the regular business of a management company shall include the functions referred to in Annex II.”? (Art. 2. par. 2.) Is it compulsory to maintain the unit-holder register? Will it be compulsory to ‘market’ (=distribute) the units? ‘Hardcore’ interpretation could have dramatic impact on the functioning of the whole market.»Operational and organizational requirements for non UCITS management companies»KID: technical problems (length, wording)

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Possible impact of UCITS IV and the new rulesPossible impact of UCITS IV and the new rules

3 types of fund management companies:» a)OTP, the regional multi: easier access to other

markets – maybe» b) companies with foreign ownership (60-70% market

share): for strong players domestic fund range will remain; more involved in distribution of mother’s funds, using the new activities

» for weak players the future is questionable, possible victims of regional concentration, sales activities can remain

» c) small domestic companies: new channels of distribution, direct access to investors, opportunities of new products and inv. strategies (incl. private equity, venture capital). For stronger and successful players regional distribution might be also an opportunity.

For the whole market: » growing independence from domestic bank/insurance

mothers/big brothers, » stronger involvement in long term savings solutions for

individual investors, » moving towards 3rd party distribution

3 types of fund management companies:» a)OTP, the regional multi: easier access to other

markets – maybe» b) companies with foreign ownership (60-70% market

share): for strong players domestic fund range will remain; more involved in distribution of mother’s funds, using the new activities

» for weak players the future is questionable, possible victims of regional concentration, sales activities can remain

» c) small domestic companies: new channels of distribution, direct access to investors, opportunities of new products and inv. strategies (incl. private equity, venture capital). For stronger and successful players regional distribution might be also an opportunity.

For the whole market: » growing independence from domestic bank/insurance

mothers/big brothers, » stronger involvement in long term savings solutions for

individual investors, » moving towards 3rd party distribution

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Market conditionsMarket conditions

Quick correction in 2009/2010» AUM of funds and proportion in houshold savings at pre-

crisis levels

Big blow from the government in 2010:» extraordinary “bank” tax: moderate level for fund

management companies, compared to banks and insurance companies

» reform (=nationalization) of 2nd pillar pension funds: 30% drop in AUM, some companies very hardly hit

Hopes in gloom:» Significant reduction of personal income tax: increase of

savings» Promise of a new supporting system for long term

savings – level playing field for all kind of products, regulated costs and transparency

Quick correction in 2009/2010» AUM of funds and proportion in houshold savings at pre-

crisis levels

Big blow from the government in 2010:» extraordinary “bank” tax: moderate level for fund

management companies, compared to banks and insurance companies

» reform (=nationalization) of 2nd pillar pension funds: 30% drop in AUM, some companies very hardly hit

Hopes in gloom:» Significant reduction of personal income tax: increase of

savings» Promise of a new supporting system for long term

savings – level playing field for all kind of products, regulated costs and transparency

www.bamosz.huwww.bamosz.hu

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