According to Article 43 (1) (b) of the IFR investment firms may include in their liquid assets: the assets referred to in Article 15 of Delegated Regulation (EU) 2015/61, up to an absolute amount of EUR 50 million or the equivalent amount in domestic currency, subject to the same conditions regarding eligibility criteria, with the exception of the EUR 500 million threshold amount referred to in Article 15(1) of that Regulation, and the same applicable haircuts as those laid down in in that Article.

Article 15 (1) of Delegated Regulation (EU) 2015/61 sets out the conditions under which shares or units in CIUs qualify as liquid assets. One of those conditions requires the CIU in question to invest only in liquid assets.

The issue arises with the definition of ‘liquid assets’ and the potential ‘contagion’ of the CIU underlying investments.

Let’s consider the following scenario:

CIU management company “A” fulfils the definition of a Union Parent investment holding company, as it owns 100% of equity of Investment Firm “B”, and is required to fulfil prudential requirements on a consolidated basis.

“A” also owns a number of units of CIU “X”, which it also manages (having complete awareness of the CIUs underlying exposures).

CIU “X” invests 80% of its funds in government bonds, 10% in corporate bonds, 5% in instruments referred to in article 43 (1) (c) of the IFR and 5% rests on short-term deposits in credit institutions.

Issue no 1. The general requirements for assets to be considered liquid for the purposes of Delegated Regulation (EU) 2015/61 are set out in Article 7 of that regulation. These however are not in line with the definition of liquid assets envisaged especially for investment firms in Article 43 (1) of the IFR. So for example short-term deposits in credit institutions would not be considered liquid for the purposes of Delegated Regulation (EU) 2015/61 but on the other hand would constitute liquid assets for the purposes of the IFR. Therefore, a question arises: should underlying assets’ liquidity of the CIU be verified based on Article 7 of Delegated Regulation (EU) 2015/61 (Option 1) or based on Article 43 of the IFR (Option 2)?

Issue no 2. If CIU invests a percentage of its’ funds in non-liquid assets (both under Option 1 or Option 2 described in Issue no 1), does this investment contaminate the CIU as a whole and if so should it not be considered to fulfil the condition set out in Article 15 (1) (b) of Delegated Regulation (EU) 2015/61 (“the CIU invests only in liquid assets”)?