Definition of default for open-end investment funds

The sole consideration if an open-ended investment fund (in the following referred to as “fund”) has legal personality or not does not determine if such fund is to be considered as the obligor for the purposes of the definition of default. Rather, it depends on the specific legal and contractual set-up if an open-end investment fund without own legal personality may be considered an obligor under Article 178(1) CRR or not. As a general criterion, the legal counterparty of a credit contract is to be considered as the obligor of the credit obligations arising from that credit contract for the purposes of the definition of default in accordance with Article 178 CRR. Notwithstanding this, where the sole assessment of the default risk of the asset management company acting as the legal counterparty of a credit contract on behalf of the fund does not reflect the actual default risk of a credit obligation, the fund may instead be considered as the obligor of such credit obligation, provided that the following conditions are met: The asset management company as legal counterparty that has entered into the credit contract on behalf of the fund is, by law or by contract, legally protected against a non-performance of the fund with regard to all payments arising from that credit contract. As a result, all such payments are solely related to the fund, and the management company that acts on behalf of the fund as legal counterparty is not liable for any payments related to credit obligations entered into for the account of the fund. The fund is, by law or by contract, legally protected against an insolvency of the asset management company, i.e. in case of an insolvency of the asset management company all due payments under the credit contract are legally protected from such insolvency and it is legally ensured that all those payments will be made without undue delay despite of the insolvency of the asset management company. Furthermore, an insolvency of the asset management company is unlikely to trigger any indications of unlikeliness to pay at fund level leading to the identification of a default according to Article 178 (1) (a) CRR pursuant to the definition of default applied by an institution to respective credit obligations. Where the fund is considered as obligor according to the abovementioned conditions, the assignment of the exposure to a rating grade or pool should be carried out at fund level. This Q&A concerns solely the interpretation of Article 178 of the CRR and the Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013” (EBA/GL/2016/07) and the assignment of IRB exposures to a rating grade or pool consistent with this interpretation. As such, it does not apply to exposures in the form of units or shares in a CIU, nor where the CRR requires a treatment as such exposures, in particular for minimum value commitments that meet all the conditions set out in Article 132c(3) CRR. Where an exposure to a CIU is assigned to the exposure class of items representing securitisation positions according to Article 112(m) or Article 147(1)(f) CRR, the securitisation framework applies. This Q&A does not interpret nor can be used for the purpose of interpreting or applying any regulations related to asset management companies and funds.