Asset Management & Investment Funds: EU & International Developments

ESMA Q&As on the AIFMD and the UCITS Directive

The European Securities and Markets Authority (ESMA) updated:

  • its Q&A on the application of the AIFMD with new Q&As on the following:
    • Application of remuneration disclosure requirements to staff of the delegate of an AIFM to whom portfolio management or risk management activities have been delegated.
    • Disclosure of AIFM delegates' staff remuneration in annual reports.
    • Periodic reporting (under Article 13 of the Regulation on reporting and transparency of Securities Financing Transactions) for UCITS and AIFs to investors on the use of securities financing transactions and total return swaps.
  • its Q&A on the application of the UCITS Directive with a new Q&A on periodic reporting (under Article 13 of the Regulation on reporting and transparency of Securities Financing Transactions) for UCITS and AIFs to investors on the use of securities financing transactions and total return swaps.

Money market funds

ESMA published its Final Report on technical advice, draft implementing technical standards and guidelines under the MMF Regulation. Some key points are set out below:

  • Destruction of shares – ESMA received significant feedback on its statement regarding destruction of shares not being allowed and notes the well-established practice of reverse distribution. This issue remains unresolved with no apparent timeline for its conclusion. ESMA is waiting for the views of the legal services of the European Commission and will then take appropriate follow-up actions in light of the pending legal assessment.
  • The liquidity and credit quality requirements for assets received under certain types of reverse repurchase agreements – ESMA’s Final Report is aligned with the preferred options of Irish Funds and includes an industry proposal to additionally treat insurance counterparties as regulated entities. ESMA has also amended the haircut requirements. 
  • MMF regulatory reporting – ESMA simplified the reporting template and deleted a number of fields. ESMA confirmed that the first quarterly reports will need to be sent to NCAs by October/November 2019. 
  • Stress testing – ESMA decided to include two different parts in its guidelines on stress testing – the first part follows a principles-based approach and the second part includes common reference stress test scenarios. ESMA plans to do further work on calibrating the parameters of the common reference stress tests and update its guidelines “in a timely enough manner” to enable managers to include these in the regulatory reports. ESMA has amended its guidelines to make aggregation of stress tests optional. 
  • Credit quality assessment – ESMA has updated its proposals on validation and credit quality criteria in a number of areas in order to take account of feedback received.  

The technical advice and implementing technical standards (ITS) have been submitted to the European Commission for endorsement. ESMA will also produce guidelines and IT guidance for the ITS on regulatory reporting. It will continue work on its stress testing guidelines to develop the calibrations for the common reference stress test scenarios (so these updated guidelines can be published at the same time as it publishes the detailed guidance on the regulatory reporting). 

MMFR will apply from 21 July 2018. Existing MMFs will have until 21 January 2019 to transition to the new regime. The Central Bank continues to engage with industry on the implementation and transition process.

EuVECAs and EuSEFs

The Regulation amending the European Venture Capital Funds Regulation (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (EuSEF Regulation) will apply from 1 March 2018. Main changes are set out below.

  • Fully authorised AIFMs will be permitted to manage EuVECAs and EuSEFs.
  • The definition of “qualifying portfolio undertaking” for EuVECAs has been broadened to cover all unlisted companies with up to 499 employees or entities listed on an SME growth market. These criteria need only be met at the time of initial funding (facilitating follow-on investments).
  • The initial capital and own funds requirements have been harmonised.
  • The roles of, and interaction between, the competent authorities of the fund and the manager have been clarified.

While the EuVECA and EuSEF labels do not attract tax incentives, they have some practical advantages (when compared with other alternative investment funds managed by authorised AIFMs). There is no legal requirement to appoint a depositary. There is a simplified marketing process which applies both in terms of eligible investors (marketing to other sophisticated investors not qualifying as “professional investors” within the meaning of the AIFMD is permitted) and because there is no waiting period before undertaking marketing activities once the marketing notification has been submitted to the regulatory authority (whereas a marketing notification submitted in accordance with the AIFMD can involve a waiting period of up to 20 business days). Also, under Solvency II, an investment in EuVECAs and EuSEFs will generally be more attractive than investments in most other types of AIFs.


MiFID II and MiFIR apply from 3 January 2018.

ESMA added 4 new Q&As  on the implementation of investor protection topics under the Market in Financial Instruments Directive and Regulation (MiFID II/ MiFIR). The new Q&As cover the topics of post-sale reporting, record keeping, and inducements. 

ESMA on charges and mutual fund returns

As detailed in last month's bulletin, ESMA published an article (in its latest Trends, Risks and Vulnerabilities No.2 2017) on The impact of charges on mutual fund returns which included a preliminary analysis of the impact of ongoing fees, one-off charges and inflation on the returns of mutual funds.

Subsequently, ESMA noted an error in that article which resulted in incorrect values in the last four rows of column five  of the chart showing Reduction in fund returns – TER and load charges. ESMA issued a corrected version where the average rate of, and relative reductions in Return on Investment have been corrected.

ESMA speech

Steven Maijoor delivered a speech on ESMA's Priorities for 2018 which discusses ESMA's work on costs and charges, MiFID II and investment research, closet indexing, performance fees, as well as stress testing, work on MMFs and Brexit. Mr Maijoor noted that "much has been said about the impact of our [Brexit] opinions on the use of delegation in the fund industry. Let me be clear: we recognise that delegation plays a key role in the current industry set-up and that it has contributed to the success of EU funds, particularly the UCITS label, across the globe. We also recognise that delegation of key functions – including to non-EU countries – is expressly foreseen by the UCITS Directive and the AIFMD. Our opinions do not call into question the delegation model. Rather, they aim to provide clarity on such elements as the appropriate substantive presence in the home Member State, the importance of oversight arrangements and the role and status of non-EU branches."

Initial coin offerings

On 13 November 2017, ESMA issued two statements on initial coin offerings (ICOs).

  • A statement for firms  notes that where ICOs qualify as financial instruments, it is likely that the firms involved in ICOs will be conducting regulated investment activities, in which case they need to comply with the relevant legislation, including:
    • AIFMD
    • Fourth Money Laundering Directive ((EU) 2015/849)
    • Prospectus Directive
    • MiFID

ESMA stresses that firms involved in ICOs should give careful consideration as to whether their activities constitute regulated activities. Any failure to comply with the applicable rules will constitute a breach.

  • A statement for investors  alerting investors to the high risk of losing all of their invested capital as ICOs are very risky and highly speculative investments.

IOSCO on termination of investment funds

The International Organization of Securities Commissions (IOSCO) published its final report setting out good practices for the termination of investment funds. The report sets out 14 good practices categorised under the headings set out below:

  • disclosure at time of investment
  • decision to terminate
  • decision to merge
  • during the termination process
  • Specific types of investment funds

IOSCO's fourth hedge fund survey

IOSCO published a report  on the findings from its fourth hedge fund survey. The aim of the survey is to gather data from hedge fund managers and advisers about the markets in which they operate, their trading activities, leverage, funding and counterparty information.

Anti-money laundering/ combating the financing of terror/ corruption

5AMLD negotiations stalled

On 14 November 2017, the European Parliament's Committees on Economic and Monetary Affairs (ECON) and Civil Liberties, Justice and Home Affairs (LIBE) published a press release on the progress of the trialogue negotiations on the proposed Fifth Anti- Money Laundering Directive (5AMLD). The committees explain that negotiations over 5AMLD have stalled after the Council of the EU attended the final scheduled trialogue meeting, which was held on 14 November 2017.

Political agreement was blocked by the Council's lack of a negotiating mandate and the absence of a text as a basis for discussion. The Parliament calls for 5AMLD to be finalised and implemented as soon as possible as transparency around beneficial ownership will help to fight money laundering and tax evasion. The Parliament expects the Council to be constructive and willing to reach an agreement before the end of the year.

4AMLD transposition

Formal notices under Art. 258 TFEU have been sent out to 16 countries in respect of failure to transpose 4AMLD (this is the first stage of the infringement procedure). The 16 countries are Romania, Portugal, Slovakia, Croatia, Latvia, Poland, Estonia, Lithuania, Bulgaria, Ireland, Netherlands, Cyprus, Finland, Luxembourg, Greece and Malta.

Date published: 1 December 2017