How Does Hedge Fund Indices and UCITS Relate to Transaction Reporting

What are Hedge Fund Indices and UCITS?

Hedge fund indices track the performance of alternative investment strategies across various asset classes. Unlike traditional stock indices, which measure the value of publicly traded companies, hedge fund indices aggregate the returns of hedge funds. Often they use a mix of hedge funds employing different strategies such as long-short equity, global macro and event-driven investing. These indices help investors assess hedge fund performance but they do not replace fund-level reporting obligations required by financial regulators.

Undertakings for Collective Investment in Transferable Securities (UCITS) are EU-regulated investment funds designed to provide investor protection, liquidity and risk diversification. Unlike hedge funds, which have greater investment flexibility, UCITS funds must comply with strict EU rules on leverage, counterparty risk and asset concentration. These funds must also comply with transparency and reporting obligations to ensure regulatory oversight and protect retail investors. One of the benefits of UCITS is that funds can be marketed to other member states through a passporting mechanism.

Why are Hedge Fund Indices and UCITs Subject to Transaction Reporting?

Although hedge fund indices and UCITS operate under different regulatory frameworks, both may engage in financial transactions requiring regulatory reporting. Derivatives trading, securities financing and other complex financial instruments make these funds subject to reporting requirements under the European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR) and Securities Financing Transactions Regulation (SFTR).

Regulatory reporting obligations are important for three main reasons:

• • • Market Transparency: reporting obligations ensure that trade information is accurately recorded, enhancing regulatory oversight to keep markets fair and efficient
    • Risk Monitoring: authorities can use transaction reports to assess systemic risks including overleverage or potential liquidity issues, reducing the risk of market disruptions
    • Investor Protection: for UCITS funds, transaction reporting helps regulators to enforce strict investment guidelines, ensuring that retail investors receive clear and accurate disclosures about fund activities

Which Regulatory Frameworks Govern Hedge Funds and UCITS Reporting

Hedge fund indices and UCITS are often required to comply with multiple regulatory frameworks to ensure transparency, risk management and investor protection.

European Market Infrastructure Regulation (EMIR)

EMIR applies when UCITS or hedge funds trade derivatives such as swaps, options, forwards and CFDs. Under EMIR, all derivatives transactions must be reported to an authorised trade repository (TR).

Since UCITs are classified as Financial Counterparties (FCs), they must comply with additional EMIR risk mitigation measures, including:

• • • Mandatory clearing through central counterparty clearing houses (CCPs) for eligible trades
    • Margin requirements
    • Trade reconciliation obligations

Hedge fund indices are not subject to EMIR reporting, but the funds that they track must comply with EMIR reporting obligations if they meet the regulatory thresholds.

Markets in Financial Instruments Regulation (MiFIR)

MiFIR mandates post-trade transparency for financial instruments traded on regulated markets, multilateral trading facilities (MTFs) or organised trading facilities (OTFs).

UCITS and hedge fund indices must report executed trades, including the following information:

• • • Execution time, price, transaction volume and the identity of counterparties
    • Trading venue details where applicable
    • Any exemptions from pre-trade transparency ie large-in-scale waivers

Reports must be submitted through Approved Reporting Mechanisms (ARMs) to ensure it reaches regulators and the Financial Instruments Reference Data System (FIRDS) for market monitoring.

Securities Financing Transactions Regulation (SFTR)

SFTR applies when hedge funds or UCITS engage in securities financing transactions (SFTs), such as repo agreements, securities lending and borrowing or margin lending.

Under SFTR, UCITS must always report SFTs which hedge funds are only subject to SFTR if classified as FCs or non-financial counterparties exceeding regulatory thresholds (NFCs+).

In addition to reporting requirements, UCITS fund managers must disclose their use of securities financing and derivatives in fund prospectuses and annual reports to maintain investor transparency. These reporting obligations help regulators to track leverage, collateral use and detect potential systemic risk within markets.

How Novatus Can Help

Ensuring accurate and timely transaction reporting is essential for UCITs, hedge funds and investment firms to remain compliant with EMIR, MiFIR and SFTR. As regulatory frameworks continue to evolve, firms must implement reliable reporting solutions to reduce errors and maintain transparency.

Novatus En:ACT is the market-leading SaaS platform, built in conjunction with a major global banking group, to ensure you meet your G20 regulatory reporting obligations in an accurate, timely and complete manner.