The Front Page, Asset Management & Investment Funds: EU & International Developments
The Front Page, Asset Management & Investment Funds: EU & International Developments
UCITS share classes
ESMA is developing a framework for UCITS share classes and has issued a discussion paper setting out high-level principles regarding share classes, focused on investor protection, which are supplemented by operational principles.
The UCITS IV Directive recognises that UCITS may offer different share classes to investors but does not set out what is permitted. In this context. ESMA had previously issued a discussion paper on UCITS share classes in December 2014 (the responses to which are helpfully summarised in Annex II to this discussion paper). ESMA also organised discussions and a roundtable with industry representatives, institutional investors and depositaries. The discussion paper sets out high-level principles regarding share classes, focused on investor protection with some operational principles. The key principles proposed are:
Common investment objective: share classes of the same fund should have a common investment objective reflected by a common pool of assets (helpfully, ESMA regards currency risk hedging at share class level as compatible with this principle);
Non-contagion: UCITS ManCos should implement appropriate procedures to mitigate and monitor the risk that features that are specific to one share class could have a potentially adverse impact on other share classes in the same fund and the paper sets out operational principles that should operate as a minimum;
Pre-determination: all features of a share class should be pre-determined before it is set up;
Transparency: Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes.
The paper highlights that share classes should never be set up to circumvent the rules of the UCITS Directive on diversification, derivative eligibility and liquidity and discusses the impact on existing share classes and transitional provisions.
The discussion paper closes to responses on 6 June 2016. ESMA anticipates taking further action on UCITS share classes by the end of 2016 (possibly in the form of an opinion under article 34 of the ESMA Regulation.
Early indications are that promoters will be able to work with the latest proposal. Headline changes include;
The removal of the sunset clause for Low Volatility Net Asset Value MMFs (LVNAV MMFs) (whereby the authorisation of LVNAV MMFs would lapse), with a review to follow in 5 years with no presumption of termination (ESRB and ESMA will be involved in the review).
The extension of the transitional period to two years (from the date the MMF Regulation comes into force). Thereafter, Constant Net Asset Value MMFs (CNAVMMFs) will need to operate as CNAV MMFs that invest in public debt instruments (Public Debt CNAV MMFs) or LVNAVMMFs or Variable Net Asset Value MMFs (VNAVMMFs).
The ability of Public Debt CNAV MMFs to invest in non-EU public debt.
On 5 April 2016, ESMA published an updated version of its Q&A paper on the application of the UCITS Directive, which has most recently been revised by UCITS V.
The Q&As have been updated with a new question which asks whether a UCITS can invest in a UCITS feeder fund. The answer given is "No". As UCITS feeder funds have to invest at least 85% of their net assets in their UCITS master fund, another UCITS cannot invest in a UCITS feeder fund. According to Article 50(1)(e)(iv) of the UCITS Directive, a UCITS can only invest in other UCITS if "no more than 10 % of the assets of the UCITS or of the other collective investment undertakings, whose acquisition is contemplated, can, according to their fund rules or instruments of incorporation, be invested in aggregate in units of other UCITS or other collective investment undertakings".
The Q&As have been updated to include a question on whether, where an EU AIF decides to offer additional fund units to investors, and the offer is limited to the investors already invested in the AIF, the AIFM must submit a new notification to the national competent authority in accordance with Article 31(2) of AIFMD. The answer is "No".
The Benchmark Regulation will enter into force following formal adoption by the Council (which is expected in May 2016) and publication in the official journal. The majority of provisions will apply 18 months thereafter (likely early 2018) with some provisions applying on the day it comes into force.
The Benchmark Regulation introduces a new EU regime regulating producers of, contributors to and users of benchmarks
Supervised entities (including UCITS, UCITS ManCos, AIFs and AIFMs) will not be permitted to use unregulated benchmarks.
Non-EU benchmarks can only be used in the EU if the benchmark is qualified under the third country regime.
The Benchmark Regulation aims to contribute to the accuracy and integrity of benchmarks used in financial instruments and financial contracts by:
ensuring that benchmark administrators are subject to prior authorisation and on-going supervision depending on the type of benchmark (e.g. commodity or interest-rate benchmarks);
improving their governance (e.g. management of conflicts of interest) and requiring greater transparency of how a benchmark is produced;
ensuring the appropriate supervision of critical benchmarks, such as Euribor/Libor, the failure of which might create risks for many market participants and even for the functioning and integrity of markets of financial stability.
Existing UCITS and AIFs will need to ensure that the benchmarks they use are working to comply with the Benchmark Regulation or find an alternative. For UCITS prospectuses approved prior to the end of the transitional period (18 months after the Benchmark Regulation enters into force) the underlying documentation will need to be updated at the next update and in any event no later than 12 months thereafter.
Supervised entities that issue financial instruments that reference a benchmark must produce "robust written plans" that set out the actions they would take should the benchmark materially change or cease to be produced. On request, these plans must be provided to the relevant competent authority.
The regulation implements and is in line with the principles for oil price reporting agencies and financial benchmarks agreed at international level by the International Organization of Securities Commissions (IOSCO) in 2012 and 2013.
After four years of negotiation, the EU General Data Protection Regulation (GDPR) has finally been agreed. It was given final approval by the European Parliament on Thursday 14 April 2016. The GDPR will replace existing EU and national data protection legislation. Companies have a two year transitionary period to comply with the GDPR, which come into force in Spring 2018.
On 7 April 2016, the Joint Committee of the European Supervisory Authorities published its final draft regulatory technical standards (RTS)on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) under the PRIIPs Regulation.
The draft RTS include:
A mandatory template which includes mandatory text and the layout.
A methodology for the assignment of each PRIIP to one of the seven classes in the summary risk indicator.
Requirements for the presentation of costs.
The press release notes that that the three-page document should increase the transparency and comparability of information about the risks, performance and costs of PRIIPs. The draft RTS have been submitted to the European Commission for endorsement and will enter into force on 31 December 2016. The European Supervisory Authorities are also developing supporting material to the draft RTS. These requirements will not apply to UCITS until 31 December 2019 at the earliest.
Under Article 32 of the PRIIPs Regulation, UCITS Mancos and SMICS and persons advising on, or selling, units of UCITS shall be exempt from the obligations under this PRIIPs Regulation until 31 December 2019. Also, where a member state applies rules on the format and content of the key information document, as laid down in UCITS Directive, to non-UCITS funds offered to retail investors, this exemption will apply (the Central Bank does not currently require retail AIFs to issue a document equivalent to a UCITS KID).
Under Article 33, the PRIPs Regulation will be subject to review. For UCITS, the review shall assess whether the transitional arrangements under Article 32 of the PRIPs Regulation shall be prolonged, or whether, following the identification of any necessary adjustments, the provisions on key investor information in the UCITS Directive might be replaced by or considered equivalent to the key investor document under this Regulation.
In practice, where UCITS are wrapped into insurance products, they may be required to provide supplementary information or data to enable the underlying insurance company to produce the PRIIPs KID ahead of 31 December 2019.
AML/CTF and the Fourth Anti-Money Laundering Directive
This assessment does not reflect the Commission's call on member states to accelerate the implementation of the Fourth Anti-Money Laundering Directive to the fourth quarter of 2016 (as set out in its Action Plan). The Commission is expected to publish the proposed Directive to amend the Fourth Anti-Money Laundering Directive by the second quarter of 2016 at the latest.
EU Commission focus on Fund Passporting, EMIR and Reporting challenges
On 21 April 2016, the European Commission published a speech given by Lord Hill, European Commissioner for the Directorate General Financial Services, Financial Stability and Capital Markets Union, on the Commission's review of the EU regulatory framework for financial services. Headline issues include that;
The Commission plans to simplify EMIR without jeopardising its core purpose of reducing systemic risk in derivative markets as part of the EMIR review currently underway.
The Commission plans to launch a consultation in May 2016 to identify the main barriers to funds passporting and will then improve passporting so that investors have more choice and enjoy lower charges, and investment funds can genuinely compete across borders.
Lord Hill takes very seriously businesses' complaints that they are reporting and disclosing the same information in different ways to comply with different pieces of legislation. The Commission look to streamline reporting requirements, templates, and reporting formats, and for common IT tools to be used to lighten the compliance burden.
The Commission plans to hold a public hearing in May 2016, and to publish its next steps in Summer 2016.
On 25 April 2016, the European Commission published its first status report on its progress towards establishing a Capital Markets Union (CMU). The report sets out the actions adopted since the adoption of the CMU Action Plan in September 2015, the key initiatives scheduled over the rest of 2016 and the preparation of other CMU actions and closely related measures that will be delivered in 2017-18. The annex contains an overview of progress achieved for the CMU actions. The Commission plans to update the status report every six months. With the report, the Commission published a further speech by Lord Hill, which again noted that in May 2016, the Commission will consult on improving the passporting system for investment funds, including UCITS.