ESMA UCITS Q&A update will necessitate a review of KIIDs disclosures on benchmarks and performance (whether the UCITS is using a benchmark or not).

The European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&As) regarding the application of the UCITS Directive. The updated Q&As clarify the following UCITS KIID benchmark and past performance obligations.

Benchmark disclosure

  • UCITS should clearly indicate, in the KIID, whether their strategy is ‘active’ (or ‘actively managed’) or ‘passive’ (or ‘passively managed’). Active UCITS which are not managed in reference to any benchmark should make this clear to investors
  • A UCITS managed in reference to a benchmark is one where the benchmark plays a role in the management of the UCITS, for example, in the explicit or implicit definition of its portfolio composition and/or performance objectives and measures (this clarification led to repeal of an existing Q&A on past performance)
  • Investors should be provided with an indication of how actively managed the UCITS is, compared to its reference benchmark index

Past performance

  • Where funds name a target in their investment objectives and policies, the performance should be disclosed against the target, even if the comparator is not named a ‘benchmark’
  • The performance disclosed in the KIID regarding a benchmark index should be consistent with performance disclosure in other investor communications

Prospectus and other fund documents will also require review and likely updating to ensure that all investor communications are consistent. ESMA has provided examples of portfolio composition and performance examples as well as guidance and sample disclosures. The new requirements should be implemented as soon as practicable or at the next KIID update.

Please speak with your usual contact in our Asset Management & Investment Funds team for more detail on this topic.

ESMA updates its Q&A on AIFMD with two new Q&As on calculation of leverage

ESMA updated its Questions and Answers on the application of the Alternative Investment Fund Managers Directive (AIFMD). ESMA has added two new Q&As on calculation of leverage under AIFMD. The Q&As provides clarification on the following points.

  • The treatment of short-term interest rate futures for the purposes of AIFMD leverage exposure calculations according to the gross and commitment methods
  • The required frequency of the calculation of leverage by an AIFM managing an EU AIF which employs leverage

ESMA updates its MAR Q&A on inside information in the context of collective investment undertakings (with examples).

ESMA updated its Market Abuse Regulation (MAR) Q&As with non- exhaustive examples where inside information might arise for listed collective investment undertakings (CIUs). ESMA notes that under Article 7 of MAR, inside information is information that is non-public, precise, directly or indirectly related to one or more financial instruments or issuer, and if it were made public would be likely to have a significant effect on the price of the issuer's financial instrument or related financial instruments. ESMA lists a non-exhaustive list of cases where inside information may arise. ESMA does not aim to cover all the possible instances of inside information. Ultimately, the final assessment has to be made on a case-by-case basis. Moreover, some of the situations may not constitute inside information in all cases. For CIUs admitted to trading/traded on a trading venue in general (including ETFs) the following situations are proposed as potential cases of inside information:

  • any situation with significant impact (appreciation or depreciation) on the valuation of the CIU assets and, as a result, on the value of the CIU's units
  • cases where the CIU has been affected by fraud, theft or an adverse tax ruling
  • unexpected circumstances in the creation/redemption of units of a CIU, including:
    • any situation under which the CIU cannot issue/redeem its units
    • creation of excessive or insufficient units due to a material mistake
  • events that will directly affect the liquidity of the market in units of an ETF arising from events impacting the entities acting as counterparties in the secondary market: bankruptcy of the official liquidity provider/s, absence of authorised participants, decision to change the segment on which the CIUs are traded and so on
  • failure or delay of a counterparty to an OTC derivative impacting the return or the risk of the CIU
  • failure or delay of a counterparty in a securities lending transaction
  • issues related to the total or partial liquidation of the CIU's assets, such as:
    • imminent insolvency or termination of the CIU, or a sub-fund where the CIU is an umbrella fund
    • partial liquidation of the CIU's units
    • modalities and payment terms preceding the liquidation or delisting of the CIU.
  • for real estate CIUs admitted to trading/traded on a trading venue, inside information according to Article 7 of MAR may also arise in the context of significant events related to the acquisition, sale or management of the CIU's real estate assets, including rents renegotiation or possible relevant losses derived from legal disputes.

ESMA also confirms that a CIU without legal personality is subject to the obligation to disclose inside information under Article 17 of MAR and the obligation should be discharged by the relevant asset manager.

Cyber resilience - ESA advice.

The Joint Committee of the European Supervisory Authorities (ESAs) published the following joint advice to the European Commission.

  • Joint Advice on the need for legislative improvements relating to Information and Communication Technology (ICT) risk management requirements in the European Union (EU) financial sector. The joint committee considers that every relevant entity should be subject to clear general requirements on the governance of ICT (including cybersecurity) to ensure the safe provision of regulated services. The proposals in the advice promote stronger operational resilience and harmonisation in the sector by applying changes to sectoral legislation. Incident reporting is highly relevant and allows relevant entities and authorities to log, monitor, analyse and respond to ICT operational, ICT security and fraud incidents. The joint committee calls for streamlining aspects of the incident reporting frameworks across the sector. They also suggest that a legislative solution for an appropriate oversight framework to monitor the activities of critical third-party service providers should be considered.
  • Joint Advice on the costs and benefits of a coherent cyber resilience testing framework for significant market participants and infrastructures within the EU financial sector. The joint committee sees clear benefits of such a framework. However, at present there are significant differences across and within the sector as regards the level of cyber maturity. In the short-term, the Commission is advised to focus on achieving a minimum level of cyber-resilience across the sector, proportionate to the needs and characteristics of the relevant entities. The joint committee proposes to establish, on a voluntary basis, an EU-wide coherent testing framework, focused on thread lead penetrating testing. It would do this with other relevant authorities, taking into account existing initiatives. In the long-term, the joint committee aims to ensure a sufficient cyber maturity level of identified cross-sector entities.

To implement the proposed reforms, the joint committee highlights the need for a legal basis and an explicit mandate. The advice does not provide technical details of the practical implementation steps. More work is needed by the joint committee, with other authorities and experts, to address specific practical and policy implementation questions.

EU Legislative Proposals

With the EU Parliament coming to end of its term (elections are scheduled for 24 May) the following EU legislative proposals are close to being finalised. Many of these proposals have been discussed in previous bulletins.

  • Directive on the cross-border distribution of collective investment funds.
  • Regulation on facilitating the cross-border distribution of investment funds.
  • Regulation on disclosures relating to sustainable investments and sustainability risks.
  • Regulation amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (the EMIR Refit).
  • Omnibus Regulation relating to the powers, governance and funding of the European Supervisory Authorities (an element of the European System of Financial Supervision or ESFS reforms).
  • Regulation amending the European Systemic Risk Board (ESRB Regulation) (another element of the ESFS reforms).
  • Omnibus Directive amending the MiFID II Directive and the Solvency II Directive (another element of the ESFS reforms).
  • Directive of the European Parliament and of the Council laying down rules facilitating the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences (AML/CTF).
  • Directive on the protection of persons reporting on breaches of Union law (Whistleblowers' Directive).
  • Regulation amending the Capital Requirements Regulation (CRR II).
  • Directive amending the CRD IV Directive (CRD V).
  • Regulation amending the Regulation establishing the Single Resolution Mechanism (SRM Regulation) (SRM II).
  • Directive amending the Bank Recovery and Resolution Directive (BRRD) (BRRD II).
  • Directive on the prudential supervision of investment firms (the Investment Firms Directive or IFD).
  • Regulation on the prudential requirements of investment firms (the Investment Firms Regulation or IFR).

Distance Marketing Directive

The European Commission is holding a consultation (closing 2 July) to assess whether the Distance Marketing of Financial Services Directive (the Distance Marketing Directive) is fit for purpose. Since the Distance Marketing Directive came into force, the retail financial sector become increasingly digital, with new products and actors available on the market, and new sales channels being used. Also, several EU laws relating to financial services have been adopted or updated. The Commission expects to public the conclusions of the evaluation exercise by the end of 2019.

ESMA first annual report on use of UCITS supervisory sanctions

ESMA published its first annual report on sanctions imposed by national competent authorities under the UCITS Directive. The report contains an overview of the applicable legal framework and information on the penalties and measures imposed by national competent authorities in accordance with Article 99e of the UCITS Directive. It covers the 2016 and 2017 calendar years. ESMA is of the view that the data on sanctions imposed during 2016 and 2017 does not allow it to observe clear trends or tendencies in the imposition of sanctions, or to produce detailed statistics based on it.

Brexit and TPR

Brexit: Exit day is currently defined as 11.00 pm on 31 October 2019. This reflects the UK and EU's second agreement to extend the Article 50 period by virtue of the ​European Council decision and the Letter from the UK’s Permanent Representative to the EU to the President of the European Council, confirming the agreement of the Government of the United Kingdom to the decision of the European Council extending the period under Article 50(3) of the Treaty on European Union. ​

The UK Government issued draft statutory instruments which create regimes allowing EEA investment funds and EEA fund managers that market EEA investment funds in the UK under a passport to continue temporarily marketing in the UK after exit day in the event of a no-deal Brexit. This is called the Temporary Permissions Regime or TPR.

The TPR will only come into force if the UK leaves the EU in a no-deal Brexit scenario. EEA UCITS and EEA AIFMs who act as manager to EEA AIFs who wish to avail of the TPR must opt in to the TPR by notifying the FCA. Notifications must be made by submitting the TPR Form using the FCA's Connect system before the notification window closes.

The FCA twice extended the notification window for the TPR from the initial deadline of the end of 28 March 2019 to the end of 11 April 2019 and then until the end of 30 May. This is as a consequence of the agreement between the EU Council and the UK Government on a delay to the process of the UK's withdrawal from the EU. If a fund manager has already submitted a TPR notification and wants to update that notification, the fund manager should notify the FCA about their intention to do so by the deadline detailed on the FCA website.

The FCA set up a TPR webpage which is a valuable source of information. The FCA warns that once the notification window has closed, funds that have not submitted a notification will not be able to use the TPR. An exception to this is where a UCITS, which has opted into the TPR, establishes new UCITS sub-funds after the exit date. The draft statutory instruments envisage that such new UCITS sub-funds will be able to avail of the TPR after the exit date.

The FCA has confirmed that this exemption will not be available for new sub-funds of an existing umbrella EEA AIF which are authorised after exit day and where the EEA AIFM, appointed to that umbrella EEA AIF, has entered one of the sub-funds into the UK (under the TPR) before exit day. The FCA has advised "New sub-funds will need to be marketed via the National Private Placement Regime (NPPR) procedure. Fund managers may, if they think it more straightforward, notify sub-funds and umbrellas in the temporary marketing permissions regime for entry via NPPR alongside any new sub-fund that they are seeking to market in the UK. Once the notification has been processed, you will have been deemed to exit the temporary marketing permissions regime for these affected funds."

The TPR also allows EEA domiciled firms which currently passport into the UK to continue business for a temporary period while they seek full FCA authorisation, again in the event of a no-deal Brexit.

The FCA will provide further information on how funds will exit the temporary permissions regime in due course.

Anti-Money Laundering/ Combating the Financing of Terror/ Corruption.


A proposal for a Directive laying down rules facilitating the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences is working its way through the EU legislative process. The United Kingdom and Ireland have notified their wish to take part in the adoption and application of this Directive

FATF Report to the G20 Finance Ministers and Central Bank Governors