Passive breach

A passive breach occurs when a limit is crossed although nobody traded into it. Prices move, other holdings fall, investors redeem, or two issuers in the portfolio merge. A 9% position becomes 10.5% under a 10% cap after the rest of the portfolio falls.

Under UCITS Article 57(2), a fund exceeding its limits for reasons beyond its control must prioritise the remedy in its sales. It must take due account of unitholders’ interests. A US diversified fund keeps its status after later value changes, unless they result from an acquisition (Investment Company Act s5(c)).

Regimes treat it more leniently than an active breach, but it is still recorded and cured within a stated period. In Acclimetry, an optional grace period in days delays the case’s clocks, while the result is a breach from the first observation. See active vs passive breach.