Undue costs - Pricing process for UCITS and AIFs

National regulators will expect a written pricing process to be developed in respect of UCITS and AIFs. This is if the ESMA proposal of 4 June 2020 directed at national regulators is implemented. The aim of the ESMA proposal is to prevent undue costs being charged to investors of UCITS and AIFs. Aside from the documented pricing process, suggestions are made about how national regulators can use their supervisory processes to prevent undue costs being charged as well as actions to be taken if undue costs materialise. As part of our Soundbite Series, listen to a five minute overview of the key aspects of the proposal from Kerill O'Shaughnessy, Partner. For more detailed information on the proposal you can download our publication from the link here.

UCITS & AIFMD revisions- draft Sustainability Directive and Regulation

The European Commission published a draft delegated UCITS directive and draft delegated AIFM regulation on the sustainability risks and sustainability factors to be taken into account for UCITS and AIFMs. The drafts are open for consultation until 6 July 2020.

The drafts reflect ESMA's Final Report to the European Commission on 30 April 2019 on revisions to the UCITS and AIFM regimes for the integration of sustainability risks and sustainability factors. The draft delegated directive and regulation reflect the ESMA Final Report.

Both the delegated directive and regulation are to apply 12 months after publication in the OJ.

Essentially the UCITS and AIFM regimes will be revised to include obligations to expressly take into account sustainability risks as part of compliance with existing organisational and governance rules.

.A summary of some of the key changes to the UCITS and AIFM regimes is set out below:

  • the definition of ‘sustainability risks’ is aligned with the definition of ‘sustainability risks’ in the EU Disclosures Regulation
  • senior management of the management company will be responsible for the integration of sustainability risks
  • management companies will be obliged to retain the necessary resources and expertise for the effective integration of sustainability risks
  • documented decision-making procedures, organisational structures, reporting lines and control mechanisms will need to be updated to ensure that sustainability risks are taken into account
  • the principle of proportionality can be factored into the integration of sustainability risks
  • processes, policies and registers around conflicts of interest will need to be updated to include conflicts that may arise as a result of the integration of sustainability risks (such as conflicts arising from the risk of greenwashing or mis-selling)
  • due diligence processes will need to be updated to take account of sustainability risk
  • where management companies, or, where applicable, investment companies, consider principal adverse impacts of investment decisions on sustainability factors, due diligence requirements and disclosures of them will also need updating
  • the risk management policy will need to be updated to consider exposures of the UCITS or AIFM to sustainability risks

Two other draft delegated acts relating to MiFID firms’ product governance and MiFID firms’ organisation requirements in relation to integrating sustainability risks and sustainability factors form a part of this package.

AIFMD update

​The European Commission issued a report on AIFMD to the European Parliament and Council on 10 June 2020. AIFMD requires the Commission, if appropriate, to propose amendments to AIFMD. The Commission is expected to issue a consultation on the AIFMD later this year.

​Potential areas for refinements to AIFMD (as reflected in the report) are detailed below.

  • Marketing and Distribution including NPPRs
    • The efficacy of the AIFM passport is impaired by national gold-plating, divergences in the national marketing rules, varying interpretations of AIFMD by national supervisors and its limited scope.
    • The AIFMD passport allows marketing only to professional investors and this restricts cross border activities as professional and retail investors can only be approached under varying and often restrictive rules. AIF distribution is subject to MiFID rules, so any changes in types of investors under AIFMD needs to take into account its interaction with MiFID.​
    • The role of National Private Placement Regimes (NPPRs) is recognised as important in market development because the AIFM passport for third country entities has not been activated. However NPPRs differ among member states and require AIFMs to implement only a limited number of AIFMD requirements. This creates an un-level playing field between EU and Non-EU AIFMs.
    • The functioning of the AIFMD third country passport has not been activated so it was not assessed.
  • Depositary (including depositary passport)
    • Targeted clarifications to the depositary regime may be necessary to address situations where AIFMs use tri-party collateral management or when CSDs act as custodians.
    • The lack of a Depositary passport is at odds with the single market.
  • Valuation
    • There may be issues with the binary nature of valuation rules as it seems the combined use of internal and external valuers is excluded.
    • The liability of external valuers could be clarified to remove uncertainty.
  • Disclosure
    • While the AIFMD disclosure regime works fairly well, particularly for conflicts of interest, some elements may be superfluous as investors request other information not prescribed under AIFMD.
  • Roles of National Competent Authorities
    • Clarifying the respective roles of National Competent Authorities (NCAs) where there is a cross border element to suspension of redemptions would be useful.
  • Reporting
    • Streamlining reporting requirements should be considered (while being mindful of the sunk costs already incurred by the compliant AIFMs). Granular information on certain asset classes (such as leveraged loans and collateralised loan obligations) and information on indirect linkages between banks and non-banks is currently missing, but is relevant for macro-prudential oversight.
  • Loan Originating AIFs
    • Some stakeholders asked the Commission to reassess the case for setting common standards for loan-originating AIFs.
  • Leverage
    • In principle the leverage calculation methodologies of gross and commitment methods are appropriate but may need refining following the Financial Stability Board’s and IOSCO work in this area, which is focused on data reporting, as well as recommendations of the ESRB for improved measures to assess macro-prudential risks.
  • Supervisory Convergence
    • Harmonisation of forms and processes and central management of databases by ESMA could further enhance AIFMD convergence.

ESG: The Taxonomy Regulation

The Taxonomy Regulation on the establishment of a framework to facilitate sustainable investment and amending the Disclosure ​Regulation enters into force on 12 July 2020.

The Taxonomy Regulation introduces an EU-wide taxonomy of environmentally sustainable activities, as well as new disclosure requirements for certain financial services firms and large public interest entities.

Articles 4, 5, 6, 7, 8(1), 8(2) and 8(3) apply from 1 January 2022 when they relate to climate change mitigation and climate change adaptation environmental objectives. The same Articles apply from 1 January 2023 when they relate to the other environmental objectives contained in the Taxonomy Regulation.

The Taxonomy Regulation is discussed in our In Focus paper on ESG-related policy, regulatory and legislative developments at EU level and their relevance for the asset management and investment funds sector

ESMA updates 2020 Annual Work Programme and publishes 2019 Annual Report

On 15 June 2020, ESMA published a revised work programme for 2020 and its 2019 Annual Report. Annex I to the work programme sets out delays to ESMA's planned consultations due to COVID-19. Among other things, these relate to work on:

  • sustainable finance
  • investment management
  • credit rating agencies
  • securitisation
  • market integrity

In particular:

  • on ESG, the JC final report on draft RTS on ESG disclosure and Taxonomy will be delayed from Q4 2020 to Q1 2021
  • ​the ESMA guidelines on leverage will be delayed from Q3 2020 to Q4 2020
  • ESMA intends to keep some flexibility to respond to potential new initiatives, such as those relating to the capital markets union (CMU).

EMIR Refit | Clearing Thresholds calculation 12 months on

Financial counterparties (FCs) and non-financial counterparties (NFCs), including UCITS and AIFs, taking positions in OTC derivatives transactions had to determine for the first time on 17 June 2019 whether they would be subject to the clearing obligation under EMIR. To do this, FCs and NFCs calculated their aggregate month-end average OTC derivative position for the previous 12 months to see if the result was above or below the EMIR clearing thresholds. This was relevant for AIFs and UCITS counterparty to any derivative contracts and you can read our May 2019 briefing on this here.

From that point on, FCs and NFCs taking positions in OTC derivative contracts and choosing to calculate their aggregate month-end average position should conduct that calculation every 12 months. From that point on also, FCs and NFCs taking positions in OTC derivative contracts and choosing to calculate their aggregate month-end average position do not need to notify ESMA and the relevant NCAs again when the results of that calculation do not change.

Similarly, FCs and NFCs taking positions in OTC derivative contracts, who chose not to calculate their aggregate month-end average position on 17 June 2019 and notified ESMA and the relevant NCAs accordingly, and who choose to continue not calculating their aggregate month-end average position, do not need to notify ESMA and the relevant NCAs again.

However, FCs and NFCs taking positions in OTC derivative contracts who did not notify ESMA and the relevant NCAs because they were below the thresholds, and who choose on 17 July 2020 or going forward not to calculate, should notify ESMA and the relevant NCAs as this would constitute a change of their status, from FC- to FC+ or from NFC- to NFC+ respectively.

A counterparty above the clearing thresholds can demonstrate at any time to the relevant NCAs that it no longer exceeds the clearing thresholds and should notify ESMA and the relevant NCAs accordingly.

EMIR Refit | Update to trade reporting obligations

From 18 June 2020, the responsibility and liability for reporting the details of OTC derivatives transactions to which the an AIF or UCITS is a counterparty will fall on the AIFM in respect of the relevant AIF, and the UCITS management company in respect of the relevant UCITS. Previously liability for the reporting obligations fell on the AIF and the UCITS.

This change is consistent with the objective of EMIR Refit ensure a proportionate compliance burden across all counterparties.

Capital Markets Union proposals

The CMU High-Level Forum published its final report. The report sets out 17 interconnected areas of recommendations aimed at removing the biggest barriers in the EU’s capital markets. The European Commission plans to publish a new Capital Markets Union Action Plan in Q4 2020.

Key proposals are set out below.

  • PRIIPS – legislative proposal by end 2022- The report calls for a review of PRIIPS as soon as possible and with sufficient time to avoid a conflict with the expiry of the exemption for UCITS.
  • Inducements – legislative proposals by end 2021 (to be agreed by end 2022) under MiFID II and IDD to align the inducement rules on sectoral legislation and improve the transparency of inducements.
  • Advisor qualifications – voluntary pan-European quality mark and legislative proposals to MiFID and IDD by end 2022 to ensure the necessary completion of training for advisors to ensure appropriate knowledge and ability.
  • Creation of new category of non-professional qualified investor – legislative proposals to MiFID II by end 2020 to introduce a new definition of qualified investor whose informational needs and protection requirements are not the same as for the other “retail” investors.
  • Pensions – Commission to identify best practices in existing systems of occupational pensions with auto-enrolment by end 2021 and to subsequently elaborate appropriate measures to foster the establishment of default occupational pension scheme membership at Member State level in a new legislative proposal. Also a pension dashboard for Member States and pension tracking systems for individuals by end 2022.
  • Proposals for improving financial literacy as key to increasing retail investor participation.
  • Targeted, prudentially sound amendments to improve EU Securitisation Framework.
  • Targeted review of ELTIF Framework to begin end of this year.

Money market fund reporting

ESMA published the official translations of its guidelines on reporting under Article 37 of the MMF regulation. NCAs to which these Guidelines apply must notify ESMA whether they comply or intend to comply with the Guidelines, within two months of the date of publication by ESMA of the Guidelines in all EU official languages.

ESMA renews its decision requiring net short position holders to report positions of 0.1% and above

ESMA has renewed its decision (discussed here) to temporarily require the holders of net short positions in shares traded on a European Union (EU) regulated market to notify the relevant NCA if the position exceeds 0.1% of the issued share capital. The measure applies from 17 June 2020 for a period of three months. The temporary transparency obligations apply to any natural or legal person, irrespective of their country of residence. They do not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, market making or stabilisation activities.


The Delegated Regulation amending the list of high-risk third countries (discussed here) was published in the OJ on 19 June 2020.

Delegated Regulation 2020/855 amends Delegated Regulation (EU) 2016/1675:

  • by adding the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe to the list of high-risk third countries (Article 2)
  • by deleting Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia from this list (Article 1)

The new Delegated Regulation comes into force on 9 July 2020 (that is, 20 days after its publication in the OJ). However, Article 2 (that is, the Article adding third countries to the list) applies from 1 October 2020. The European Commission believes that the later date should give firms sufficient time to make the changes required to implement this provision. Irish Funds and other Irish Regulated Financial Service Providers will be assessing the impact of these changes and preparing for compliance accordingly.

For the first time, the list is based on the revised methodology which requires increased interaction with the FATF listing process, enhanced engagement with third countries and reinforced consultation of member states and the European Parliament.

ECB Opinion on the appointment of the Central Bank of Ireland as registrar for registers of beneficial ownership for certain financial entities.

The European Central Bank (ECB) issued an Opinion of 18 June 2020 on the appointment of the Central Bank of Ireland (CBI) as registrar for registers of beneficial ownership for certain financial entities.

On 27 May 2020 the Irish Minister for Finance requested ECB for an opinion on draft European Union (Modifications of Statutory Instrument No. 110 of 2019) (Registration of Beneficial Ownership of Certain Financial Vehicles) Regulations 2020. On 9 June 2020, the Irish Minister for Finance had further requested ECB for an opinion on a draft Investment Limited Partnerships (Amendment) Bill 2020.

This is because a proposed conferral of new tasks on a National Central Bank in the European System of Central Banks must be assessed against the prohibition on monetary financing under Article 123 of the Treaty on the Functioning of the European Union. In this case, ECB recommended some clarifications to the proposals to ensure that CBI own funds would not be used to meet the costs and expenses of these non-core tasks.

The opinion also considers, in detail, the possible impact of the task on the institutional, financial and personal independence of CBI. It notes that the performance of the new task does not fit smoothly into the institutional set-up of the CBI. The new task does not complement the CBI’s other tasks. The operation of the registers will be functionally separated from the AML/CFT and prudential supervisory roles of the CBI.