Updates to UCITS Directive, AIFMD and other legislative reforms.

On 8 November 2019, the Council of the EU announced, as part of its capital markets initiative, that it adopted a number of legislative reforms. Preliminary texts are included in the press release. They are expected to be published in the Official Journal soon. They include:

  • Sustainable finance: the Disclosure Regulation. This regulation concerns disclosures relating to sustainable investments and sustainability risks in the financial services sector. It will impose transparency obligations for sustainable investments and will impose obligations on AlFMs & UCITS ManCos as to how they integrate environmental, social and governance factors in their investment decisions and how these are disclosed.
  • Sustainable finance: the Low Carbon Benchmarks Regulation. This regulation will amend the Benchmarks Regulation. The regulation creates new types of benchmarks aimed at giving greater information on an investment portfolio's carbon footprint. These are:
    • the EU climate transition benchmarks, which aim to lower the carbon footprint of a standard investment portfolio, and
    • the EU Paris-aligned benchmarks, which have the more ambitious goal to select only components that contribute to attaining the 2°C reduction set out in the Paris climate agreement.
  • Investment firms. The Investment Firms Regulation and the Investment Firms Directive will update the prudential requirements of investment firms (including AlFMs & UCITS ManCos) so as to factor in size, nature and complexity. They will amend the Capital Requirements Regime, the Markets in Financial Instruments Regime, the EBA Regulation and the Investment Firms Directive. The current capital requirements regime is based on international standards intended for banks and does not take account of the nature of investment firms. In future, investment firms will be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they will need to apply will be differentiated according to their size, nature and complexity.
  • Covered bonds. The Directive and Regulation on Covered Bonds set new harmonised rules for covered bonds. The rules comprise product requirements and supervision of covered bonds.. The framework also specifies a common definition for receiving an EU covered bond label and benefit from preferential capital treatment. The UCITS Directive will be amended to reflect this preferential capital treatment by refining the provision for the Member State option to raise the 5 % limit to 25% for bonds issued by a single body. Covered bonds are financial instruments issued by a credit institution and backed by a separate pool of assets - typically mortgages or public debt - to which investors have a preferential claim in case of failure of the issuer. Covered bonds are seen as an efficient source of financing of the economy which ensure a high level of certainty for investors.

EU Commission fitness check of EU supervisory reporting requirements

executive summary on the findings of its fitness check of EU supervisory reporting requirements. The Commission concludes that the requirements are broadly effective and identified areas for improvement.

ESMA speech on fund liquidity

Steven Maijoor, chairman of ESMA, delivered a keynote address at EFAMA’s Investment Management Forum.

Key take-away's included:

  • ESMA will facilitate a common EU supervisory action on liquidity management by UCITS. EU National Competent Authorities will agree to simultaneously conduct supervisory activity in 2020 on the basis of a common methodology to be developed within ESMA.
  • Asset managers are currently required to ensure that the investment strategy and liquidity risk management are consistent with the redemption policy communicated to investors.
  • UCITS managers are currently required to employ an appropriate liquidity risk management process in order to ensure that each UCITS they manage is able to comply with redemption requests.
  • UCITS managers are currently required to ensure that for each UCITS they manage the liquidity profile of the investments of the UCITS is appropriate to its redemption policy. Existing rules address the liquidity profile of eligible assets (referencing the Commission Level 2 Directive in 2007,known as the Eligible Assets Directive).
  • ESMA observes funds, including ETFs, investing in less liquid markets such as commodity, gold or high yield. Eventually this may lead to unrealistic expectations of liquidity, if the perceived liquidity of these funds does not reflect the liquidity of their underlying.
  • ESMAs Liquidity Stress Testing (LST) Guidelines in UCITS and AIFs promote convergence in the way national competent authorities supervise funds liquidity stress. These set out minimum standards for the design and frequency of LST models, the governance principles for LST and how LST should be incorporated in the fund’s risk management policies and procedures. These are enhanced by MMF stress testing Guidelines and will be updated yearly
  • The growth of the fund sector by more than 60% since 2013 increases the risk that forced sales by asset managers in a difficult market could depress asset valuations thereby transmitting stress to other institutions. Cascading effects from fire sales can ultimately amplify deterioration of market confidence and deepen a crisis.

Amendment of PRIIPs Delegated Regulation to align transitional arrangements

Commission Delegated Regulation (EU) 2019/1866 amends the PRMPs Delegated Regulation to align the transitional arrangements for PRIIP manufacturers offering units of UCITS and non-UCITS funds (referred to in Article 32 of the PRIIPs Regulation) as underlying investment options. It extends the transitional arrangements by two years, to 31 December 2021. It entered into force on 28 November 2019.


Following the recent extension to Brexit until 31 January 2020 (discussed here). ESMA confirmed that previous statements about its preparations for a no-deal Brexit on 31 October 2019 no longer apply. ESMA will issue further announcements and updated measures as matters develop.



FATF November business bulletin

The FATF is holding a strategic review with a focus on how FATF evaluations of countries can better promote and enable more effective and efficient AML/CFT measures.