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ESMA call for evidence on the review of the UCITS Eligible Assets Directive

Asset Management & Investment Funds

ESMA call for evidence on the review of the UCITS Eligible Assets Directive

On 7 May 2024 ESMA published a call for evidence as part of its review of the UCITS Eligible Assets Directive.

Thu 30 May 2024

5 min read

On 7 May 2024, ESMA published a call for evidence (CfE) as part of its review of the UCITS Eligible Assets Directive[1] (UCITS EAD).

The CfE will be of interest to Fund Management Companies (Fund Managers) and other service providers and promoters of Undertakings for Collective Investment in Transferable Securities (UCITS) who are invited to respond to ESMA’s questions on the manner and the extent to which UCITS have gained direct and indirect exposures to certain asset classes that may give rise to divergent interpretations and/or risk to retail investors.

Background to the CfE

UCITS are the key retail investment product in the EU, accounting for around 75% of all collective investments by retail investors in the EU. The success of UCITS as a global brand is based on their established reputation of being well-regulated and supervised investment products.

The UCITS Directive[2] requires that UCITS are invested in assets subject to stringent eligibility criteria, with a view to ensuring adherence to the principles underlying the UCITS Directive, such as liquidity, risk-diversification, the ability of the UCITS to redeem its units or shares at the request of the investors and to calculate its net asset value whenever units are issued or redeemed.

Since the adoption of the UCITS EAD in 2007, the number, type and variety of financial instruments traded on financial markets has increased considerably. This has lead to uncertainty in determining whether certain categories of financial instruments are eligible for investment, in turn giving rise to divergent interpretations and market practices in terms of the application of the UCITS Directive and possible investor protection concerns.

Against this background, in June 2023, the European Commission requested that ESMA carry out an assessment of the implementation of the EAD and make recommendations on how the EAD should be revised to keep it in line with market developments. The mandate includes that ESMA:

ESMA’s previous work in relation to UCITS investment related issues, includes Q&As, an ESMA Opinion on certain investment limits set out in the UCITS Directive and ESMA Guidelines on exchange-traded funds (ETFs) and other issues. ESMA also performed a peer review in 2018 and a follow-up peer review in 2023 on efficient portfolio management (EPM). In addition, ESMA’s Common Supervisory Action (CSA) on costs and fees, also assessed UCITS’ compliance with the applicable legal requirements and ETF guidelines when using EPM techniques.

Call for evidence – questions to stakeholders

The CfE is divided into separate sections which seek to collect evidence on:

Convergence issues and clarity of key concepts

The questions in this section include:

  1. financial indices
  2. money market instruments
  3. notions of liquidity or liquid financial instruments
  4. the 10% limit set out in the UCITS Directive for investments in transferable securities and money market instruments other than those referred to in Article 50(1) of the UCITS Directive (sometimes referred to as the ‘trash bucket’)
  5. the ‘transferable security’ criteria
  6. valuation and risk management criteria
  7. financial instruments backed by, or linked to the performance of asset other than those listed in Article 50(1) of the UCITS Directive
  8. embedded derivatives
  9. delta-one instruments (ESMA is aware of diverging interpretations on the treatment of delta-one instruments under the EAD and requests details of their eligibility assessment per product)
  10. UCITS investment in other UCITS and AIFs, including in EU ETFs and non-EU ETFs

Direct and indirect UCITS exposures to certain asset classes

Respondents are asked to complete a table on the merits of allowing direct or indirect UCITS exposures to certain asset classes on which there are divergent views as regards their eligibility. They should also assess and provide evidence on the merits of such exposures in light of their risks and benefits taking into account the characteristics of the underlying markets. This could include availability of reliable valuation information, liquidity and safekeeping. Respondents should also elaborate and provide evidence on whether indirect exposures increase or decrease the costs and/or risks borne by UCITS and their investors.

The table includes:

Other questions in this section seek views on:


It is clear that questions around liquidity are driving a lot of the focus of the European Commission and are therefore heavily reflected in the CfE. Recent UCITS issues have focused the minds of regulators on the need to analyse the liquidity of instruments rather than treating all instruments that have the same legal terminology in the same way from a liquidity perspective. The UCITS Directive and ESMA Guidelines on liquidity stress testing already impose requirements on Fund Managers, but we can expect that changes to the EAD arising out of the Commission’s review will lead to more granular liquidity analysis requirements. This would be preferable to banning entire asset classes solely because of a concern that certain aspects of those instruments on the fringes may have questions around liquidity.

Next steps

Responses to the CfE should be submitted online to ESMA by Wednesday 7 August 2024.

ESMA will take account of feedback received from stakeholders in developing its technical advice, which is due to be delivered to the Commission by 31 October 2024.



If you would like to discuss the contents of the CfE in more detail or require assistance in preparing a CfE response, please get in touch with any member of ALG’s Asset Management and Investment Funds team.

Date published: 30 May 2024

1] Directive 2007/16/EC

[2] Directive 2009/65/EC (UCITS) (recast)

[3] (1) Peer review on the ESMA Guidelines on ETFs and other UCITS issues; (2) follow-up peer review on the ETF Guidelines; and (3) CSA on costs and fees.

[4] Regulation (EU) 2015/2365 on transparency of securities financing transactions and of reuse

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