Asset Management & Investment Funds: EU & International Developments – Jan 2022

PRIIPs KID deadlines

The obligation on UCITS to transition from a UCITS KIID to a PRIIPs KID has been deferred to 1 January 2023

  • A Directive was adopted which amends the UCITS Directive so that from 1 January 2023, a UCITS can produce a PRIIPs KID to satisfy the requirement to produce a UCITS KIID.  This avoids UCITS having to produce both a PRIIPs KID and a UCITS KIID.  The Directive will need to be implemented by Member States by 1 July 2022.
  • A corresponding Regulation amends the PRIIPs Article 32 transitional arrangements so as to extend the UCITS exemption to 31 December 2022.

A further Regulation, amending the PRIIPs RTS, contains adaptations for UCITS and retail AIFs to comply with the PRIIPs KID. This Regulation will apply from 1 July 2022. Every QIAIF or RIAIF which currently publishes a PRIIPS KID (because it is marketed to EEA retail investors) will need to update that PRIIPS KIID to comply with the revised Level 2 Measures and publish the revised PRIIPS KID from 1 July 2022

An updated PRIIPs KID Q&A was published by the ESAs. New Q&As cover:

  • general topics
  • market risk assessment - product categories
  • performance scenarios
  • costs of PRIIPs other than investment funds
  • presentation of costs

The EU Commission is required to produce a report as a matter of urgency addressing problems in the PRIIPs Regulation including the need for a clearer definition of retail investors and the product scope.

The ESAs opened a call for evidence on the PRIIPs Regulation that closed on 16 December 2021. The ESAs also plan to hold a stakeholder event in Q1 2022 before finalising the advice. The review arises from the capital markets action plan and the strategy for retail investments in the EU. The input provided will feed into the ESAs' technical advice on a review of the PRIIPs KID.

ESMA CSA on the valuation of UCITS and open-ended AIFs

ESMA launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the valuation of UCITS and open-ended AIFs across the EU.

  • The CSA aims to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets, and will be conducted throughout 2022.
  • The CSA will focus on authorised managers of UCITS and open-ended AIFs investing in less liquid assets i.e.: unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans.
  • The work will be done using a common assessment framework developed by ESMA, which sets out the scope, methodology, supervisory expectations and timeline for how to carry out a comprehensive supervisory action in a convergent manner.
  • Throughout 2022, NCAs will share knowledge and experiences through ESMA to foster convergence in how they supervise valuation-related issues. One core objective is the consistent and effective supervision of valuation methodologies, policies and procedures of supervised entities to ensure that less liquid assets are valued fairly both during normal and stressed market conditions, in line with applicable rules.
  • The current economic conditions underline the importance of assessing valuation risks which may pose a potential threat to financial stability and this exercise is of utmost importance to effectively address this risk at EU level. 
  • This is the third CSA that ESMA and NCAs have launched on asset management. The first two covered UCITS liquidity risk management  and supervision of costs and fees in UCITS.

 

ESMA's UCITS Q&A and investment restrictions

ESMA updated its UCITS Q&A with a new Q&A which clarifies that UCITS cannot invest up to 100% of their assets in transferable securities or money markets instruments that are not issued nor guaranteed by a Member State, one or more of its local authorities, a third country or a public international body to which one or more Member States belong. In addition, Article 54(1) of the UCITS Directive unambiguously provides that if a UCITS holds more than six issues in transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country or a public international body to which one or more Member States belong, all the issues should respect the 30% limit (i.e. even if the UCITS holds more than six issues).

The question concerned UCITS investing up to 100% of their assets in transferable securities issued by certain issuers e.g. sovereigns:

  • Do the six different issues refer to any kind of transferable securities or money market instruments?
  • If the UCITS holds more than six different issues must all of these issues comply with the 30% limit?

ESMA's UCITS Q&A and hedged share classes

ESMA updated its UCITS Q&A with a new Q&A on hedged share classes. It clarified that FX forward are OTC instruments. This means that when UCITS invest in this type of instruments for currency hedging purposes in a share class they should comply with the counterparty risks limits laid down in Article 52(1) of the UCITS Directive in respect to the NAV of the share class as provided in paragraph 26a of the ESMA’s Opinion on share classes.

Therefore, unrealised FX profits and losses should be counted towards the NAV of the hedged share class of the UCITS and taken into account when calculating the counterparty risk limits of Article 52(1) of the UCITS Directive in respect to the NAV of the hedged share class.

The question concerned a situation where a UCITS has a hedged share class in a different currency:

  • Should unrealised FX profits and losses be counted towards the NAV of the hedged share class and accordingly be taken into account when calculating the counterparty risk limit of Article 52(1) of the UCITS Directive?

The question concerned advance notice for the marketing of new share classes of UCITS for cross-border marketing:

  • If a UCITS intends to market a new share class in a host Member State where it has already been notified for marketing, should the UCITS give written notice to the competent authorities of the UCITS home and host Member States, at least one month before the marketing of the new share class starts?

 

ESMA's UCITS Q&A and marketing of new share classes of UCITS for cross-border marketing

ESMA updated its UCITS Q&A with a new Q&A which clarified that, if a UCITS intends to market a new share class in a Member State where it has already been notified for marketing, the UCITS should give written notice to the competent authorities of both the UCITS home and host Member State, at least one month before the marketing of the new share class starts.

ESMA's AIFMD Q&A and investment in crypto-assets

ESMA updated its AIFMD Q&A to include a question on whether managers of undertakings investing in crypto-assets are subject to AIFMD. In summary, while AIFs may invest in crypto-assets, there may be specific investment, risk diversification and investor limitations at national level. ESMA also highlights the risks involved in investing in crypto-assets.

ESMA letter on the use of reverse solicitation

On 17 December ESMA responded to a letter from the Commission asking for support in relation to Article 18 of Regulation 2019/1156 (cross-border distribution of funds) which requires the Commission to consult competent authorities, ESMA and other relevant stakeholders, and subsequently to submit a report to the European Parliament and the Council on reverse solicitation.

ESMA were asked for input from NCAs on a number of questions relating to the use of reverse solicitation by asset managers and the impact on passporting activities. ESMA conducted a survey among NCAs on these questions.

The survey showed that almost all NCAs have no readily available information on the use of reverse solicitation either via asset managers or investor associations. Consequently, the vast majority of NCAs were not in a position to provide an estimation of the share of reverse solicitation as compared to marketing.

Some NCAs provided some interesting information on the extent to which reverse solicitation is used in their jurisdiction that allows ESMA to share some anecdotal evidence of the use of reverse solicitation within the Union:

  • In 2020, 25% of the total subscriptions in funds gathered by Italian asset managers (ruling out the amount distributed through third-party distributors) were done on the basis of reverse solicitation and, in 99% of the cases, these subscriptions were made for the account of professional investors.
  • 30% of the UCITS management companies and 50% of AIFMs established in Cyprus use reverse solicitation.
  • In the absence of quantitative information for other Member States, it is difficult at this stage to draw any conclusion for the rest of the Union.

Lastly, Article 18 of the regulation requires that the report shall also examine whether the notification portal established in accordance with Article 13(2) should be developed, so that all transfers of documents between NCAs take place through it. ESMA confirmed that this extension has been proposed for prioritisation in the context of the 2022 IT ESMA budget.

EU list of high risk third countries

The EU Commission adopted and published a new delegated regulation amending its list of high-risk third countries. The new act proposes to:

  • add the following to the list of high-risk third countries: Burkina Faso, Cayman Islands, Haiti, Jordan, Mali, Morocco, the Philippines, Senegal, and South Sudan
  • delete the following from the list: the Bahamas, Botswana, Ghana, Iraq and Mauritius

Parliament and Council have one month to lodge their objections to the regulation. If there are no objections, it will be published in the OJ and enter into force 20 days afterwards.

Date published:     January 2022

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 31 January 2022