Legal Updates

 Asset Management and Investment FundsMay 19, 2022

Central Bank publishes guidance on use of side-pocketing arrangements by UCITS facing valuation difficulties due to the Russian invasion of Ukraine

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For further information on any of the issues discussed in this publication please contact the related contact(s) on this page.

Key Points to Note:

  • ESMA has published a public statement outlining appropriate action that can be taken by Impacted Funds experiencing valuation issues as a result of the Russian invasion of Ukraine
  • In response to the ESMA Statement, the Central Bank has published its guidance on the use of side pocket arrangements by UCITS Impacted Funds which involves the transfer of liquid assets to a clone UCITS fund.


On 16 May 2022, ESMA released a public statement setting out appropriate actions which could be taken by funds with material exposure to Russian, Belarusian and Ukrainian assets (Impacted Funds) in order to deal with valuation issues arising from the exceptional market conditions arising from the war in Ukraine (ESMA Statement).

The ESMA Statement notes the various liquidity management tools available to UCITS and AIF funds which include temporary suspension of dealing, total write-off of relevant assets or the liquidation of the relevant Impacted Fund as well as the segregation of illiquid assets from liquid assets in the fund portfolio.

The ESMA Statement notes that the UCITS framework does not currently contemplate the use of side pockets. It confirms that for the purpose of managing the impact of the Russian invasion of Ukraine on the portfolio of an Impacted Fund, arrangements to create a side pocket in UCITS could be permitted provided that certain conditions have been satisfied.

In response to the ESMA Statement, the Central Bank subsequently published guidance on the use of side pocket arrangements by Irish UCITS Impacted Funds (Central Bank Guidance) which, if used, will involve the creation of a new UCITS product to which the liquid portion of the assets of the Impacted Fund are transferred.

What is a UCITS side pocket arrangement under the Central Bank Guidance?

Different to the side pocket arrangements permitted under existing Irish rules for an Irish QIAIF fund1, both ESMA and the Central Bank describe a side pocket arrangement for a UCITS as the segregation of liquid and illiquid assets by:

  1. transferring the liquid assets of the UCITS Impacted Fund (Original UCITS) to a newly established cloned UCITS fund (New UCITS);
  2. retaining the illiquid/difficult to value securities (Affected Securities) in the Original UCITS;
  3. investors in the Original UCITS receiving shares of the New UCITS in the same proportion as their investment in the Original UCITS while continuing to have a pro-rata holding in the Original UCITS; and
  4. new investors subscribing only to the New UCITS.

Has the Central Bank imposed any specific conditions on the implementation of a side pocket arrangement by an Irish UCITS?

Yes. The Central Bank Guidance imposes the following conditions:

  1. The proposal must be in the best interests of shareholders of the Original UCITS;
  2. Investors in the Original UCITS must have approved the transfer into the New UCITS;
  3. The Original UCITS has obtained the prior written approval of the Central Bank for the proposal;
  4. The UCITS must clearly disclose to shareholders in the UCITS the costs and fees associated with establishing the side pocket as well as providing this information in the prospectus;
  5. The Original UCITS is placed in “wind-down mode” at the same time as the creation of the New UCITS;
  6. The Original UCITS has established written policies outlining how the Affected Securities will be managed, including policies relating to the costs and fees associated with the maintenance of the Original UCITS; and
  7. The Original UCITS reports to the Central Bank on an annual basis in the manner detailed in the Central Bank Guidance.

What is the timeframe for approval of a New UCITS by the Central Bank?

In acknowledgement of timing sensitivities which may arise, the Central Bank has confirmed that its normal timeframe for processing UCITS funds applications will not apply when establishing a New UCITS for the purpose of implementing a side pocket arrangement in such exceptional circumstances.

Subject to all conditions being met to create the clone UCITS and all of the required documentation being filed with the Central Bank, the application will be processed within 5 working days of submission of the complete application.

What documentation must be filed with the Central Bank when seeking approval of a New UCITS as part of a side pocket arrangement?

An application for approval of a New UCITS should be made in the normal manner. The Central Bank has prescribed that the following documents must be filed as part of the complete application in order to benefit from the streamlined timeframe:

  1. A confirmation from the directors confirming that the New UCITS is identical to the Original UCITS;
  2. A copy of the resolution approving the establishment of the New UCITS; and
  3. A mark-up of the investment objective and policy of the New UCITS against that of the Original UCITS.

Has ESMA identified any advantages and/or disadvantages of a side pocket arrangement?

Yes. According to ESMA, side pocket arrangements may, in certain circumstances, be preferable to a suspension in dealing in order to allow existing investors to access liquidity by realising the liquid part of the portfolio as well as to protect “against potential dilution effects, especially where the illiquid assets are valued at zero or significantly lower prices”.

However, ESMA does note that there are other liquidity management tools and arrangements which are similar or equivalent to the side pocket arrangement described above which may achieve the same aim. It also highlights the cost implications of creating a side pocket arrangement and notes that some national competent authorities and stakeholders have flagged potential operational problems that some fund distribution platforms have with the creation of side pockets.


As noted in the ESMA Statement, in deciding the appropriate action to be taken in order to manage valuation and related liquidity difficulties arising in an Impacted Fund, fund management companies must act in the best interests of all investors and should consider, inter alia, the “possible value that could be recovered, the amount of affected assets and their weight in the total portfolio, the cost of each measure” as well as the tools available to them under both EU and national rules.

Careful consideration will need to be given on a case by case basis to the operational and tax implications of implementing a side pocket arrangement. However, the publication of the Central Bank Guidance which, for the first time, permits the use of side pocket arrangements for UCITS Impacted Funds, is a welcome development.

If you have any questions relating to this briefing, please get in touch with your usual Dillon Eustace contact.

1 Chapter 2 of the AIF Rulebook published by the Central Bank permits QIAIFs to establish side pocket classes into which assets of the relevant QIAIF which have become difficult to value or illiquid may be placed subject to certain conditions being satisfied.

    DISCLAIMER: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Dillon Eustace.

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