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Asset Management & Investment Funds: EU & International Developments – May 2024

Asset Management & Investment Funds

Asset Management & Investment Funds: EU & International Developments – May 2024

ESMA Guidelines on funds’ names, UCITS Eligible Assets, UK overseas funds regime, macroprudential measures for investment funds, AML/CFT/FS.

Tue 28 May 2024

11 min read

ESMA's final guidelines on ESG fund names

Following its November 2022 consultation, the European Securities and Markets Authority (ESMA) published its final Guidelines on funds’ names using ESG or sustainability-related terms (the guidelines). The guidelines aim to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

Among other changes resulting from the consultation process, ESMA has removed the 50% threshold for sustainability-related terms, replaced with a commitment to invest meaningfully in sustainable investments, and has introduced a new category for transition-related terms.

The guidelines apply to managers of UCITS and AIFs and require that:

  1. funds using transition, social and governance terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives and apply the climate transition benchmark (CTB) exclusions
  2. funds using environmental or impact-related terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives and apply the Paris-aligned benchmark (PAB) exclusions
  3. funds using sustainability-related terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives, apply the PAB exclusions, and invest meaningfully in sustainable investments as defined in Article 2(17) SFDR

The guidelines also provide:

The key terms are explained more fully in the guidelines. Read more about the guidelines here.

Next steps

The guidelines will be translated into all EU languages and will subsequently be published on ESMA’s website. They will start applying three months after that publication.

ESMA’s call for evidence on UCITS eligible assets

ESMA published a Call for Evidence (CfE) on the review of the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD). The purpose is to gather information from stakeholders to assess possible risk and benefits of UCITS gaining exposure to various asset classes.

This CfE seeks to gather information on convergence issues, clarity of key concept and definitions and direct and indirect UCITS exposures to certain asset classes and related data collection/analysis. 

• The CfE will look at the question of UCITS eligibility of direct or indirect exposures to asset classes such as structured/leveraged loans, catastrophe bonds, commodities, crypto assets and emission allowances.

• The UCITS EAD distinguishes between

The CfE considers whether and when a look-through approach is required in these cases to determine the eligibility of the asset and the distinction between the two concepts. This issue is particularly important in the context of discussions on the eligibility of delta-one instruments and exchange-traded products which might provide UCITS with exposures to asset classes that are not eligible for direct investment.

• The CfE is also gathering insights on other issues such as the notion of ‘liquidity’ which is frequently used in the UCITS Directive and UCITS EAD without further specification. The UCITS EAD requires that the liquidity of transferable securities “does not compromise” the ability of the UCITS to comply with its obligation to repurchase/ redeem at the request of its investors. This gives rise to questions of interpretation.

• The CfE seeks views and experiences on the presumption of liquidity and negotiability set out in the UCITS EAD. In the course of the 2020 ESMA CSA on UCITS liquidity risk management, NCAs identified shortcomings with respect to the presumption of liquidity and negotiability set out in the UCITS EAD. In some cases, UCITS managers placed an overreliance on the presumption of liquidity where they invested in listed securities (such as instruments listed offshore with no meaningful trading volume). In other cases, managers applied the presumption of liquidity also to non-listed instruments. Some stakeholders and NCAs expressed support for further legislative clarifications with a view to ensuring that market participants have a clear understanding of the regulatory expectations and that NCAs have a stronger legal basis to take follow-up supervisory or enforcement actions.

Please speak with your usual contact on the ALG Asset Management & Investment Funds team if you would like to discuss the consultation or contribute to our response. ESMA will consider all comments received by Wednesday 7 August 2024 and will develop its technical advice to the European Commission.

UK roadmap for the overseas funds regime

The UK Financial Conduct Authority (FCA) and HM Treasury jointly issued a roadmap to explain how the Overseas Funds Regime (OFR) is to be opened to European Economic Area (EEA) funds authorised under the UCITS Directive. This follows the UK Government’s decision to grant equivalence in relation to those funds (with the exception of money market funds).

The OFR is meant to replace the current Temporary Marketing Permissions Regime once it expires.

The roadmap set out the anticipated timeline for implementation of the OFR, the application process and other requirements for OFR funds. The FCA will publish additional information including the ‘landing slots’ for funds that will be transitioning from the TMPR. Estimated timelines are below.

MMFs: the UK Government is designing a more permanent access route for overseas MMFs and consulted on this in December 2023. The UK Government will consider further extensions to the TMPR as necessary to avoid any potential ‘cliff edge’ risks for these products.

Other requirements for OFR funds cover:

Macroprudential policy for NBFIs - consultation

The international debate on a macroprudential framework for the fund sector continues. Liquidity mismatch and leverage remain key priorities.

The EU Commission opened a consultation on its review of non-bank financial intermediation (NBFI) which closes 22 November 2024. It also launched a webpage on macroprudential policy.

Article 513 of Regulation (EU) No 575/2013 (CRR) requires the Commission to review the EU macroprudential framework including credit institutions’ exposures to NBFI. The Commission has expanded the review to incorporate the effectiveness and consistency of macroprudential policies for NBFIs in the EU, focusing in particular on:

The consultation seeks specific feedback in respect of money market funds and other open-ended funds as well as other stakeholders.

This follows the Central Bank of Ireland’s (CBI) international conference on macroprudential policy for investment funds on 20 May 2024 which included keynote speeches from Verena Ross, ESMA Chair, and Klaas Knot, Chair of the Financial Stability Board (FSB) as well as CBI speeches.


EU list of high-risk third countries

The European Parliament has objected to the proposed European Commission delegated regulation amending the list of high-risk third countries under 4AMLD to:

The European Parliament requests the Commission to submit a new delegated act which takes account of the concerns set out in its objection.

Directive harmonising penalties for breaches of financial sanctions obligations

The Directive setting new rules to harmonise criminal offences and penalties for the violation of EU restrictive measures (financial sanctions) has come into force and is to be transposed by Member States by 20 May 2025. The directive provides that such criminal conduct constitutes a criminal offence when it is intentional and in violation of a financial sanction. Certain conduct should constitute a criminal offence also if carried out with serious negligence.

Financial Sanctions: EU Commission FAQs on outgoing transfer reporting

Following the introduction of Article 5r in the Council Regulation (EU) No 833/2014 of 31 July 2014, the European Commission published FAQs and the reporting template to be used for reporting under Article 5r as discussed in our April bulletin and summarised below:

From 1 July 2024, credit and financial institutions will be required within two weeks of the end of each calendar semester (on a semi-annual basis), to report to their National Competent Authority (the CBI for regulated financial service providers), information on all transfers of funds outside of the EU of a cumulative amount over that semester, exceeding €100,000 that they initiated, directly or indirectly, for any legal person, entity and body established in the EU which is directly or indirectly owned more than 40% by:

(i) legal person, entity or body established in Russia

(ii) Russian national

(iii) natural person residing in Russia.

For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.

Date published: 28 May 2024