Asset Management & Investment Funds: EU & International Developments – January 2024

ESMA’s planned consultation papers for 2024

ESMA’s planned consultation papers for 2024 include:

  • UCITS - call for evidence on the review of the UCITS Eligible Assets Directive due Q1-Q2 2024
  • AIFMD - guidelines on the selection and calibration of liquidity management tools due Q2-Q3 2024
  • AIFMD - regulatory technical standards (RTS) on open-ended loan-originating AIFs due Q2-Q3 2024
  • AIFMD - RTS on the characteristics of liquidity management tools due Q2-Q3 2024
  • UCITS - guidelines on the selection and calibration of liquidity management tools due Q2-Q3 2024
  • UCITS - RTS on the characteristics of liquidity management tools due Q2-Q3 2024
  • Sustainable finance - RTS on the European Single Electronic Format for reporting sustainability information under the European Sustainability Reporting Standards (ESRS) due Q3 2024
  • AIFMD - technical standards and guidelines as part of AIFMD review (other than those relating to reporting) due 2025
  • UCITS - technical advice to the European Commission on possible amendments to the UCITS Eligible Assets Directive due 2025

The above list does not include Securitisation Regulation, MICA, MiFID, MiFIR, EU Green Bond Regulation, Supervision, DORA, EMIR.

ELTIF RTS

On 19 December 2023, ESMA published its final report containing draft RTS under ELTIF 2.0 which applies from 10 January 2024.

ELTIF 2.0 removes many of the regulatory obstacles for ELTIFs, making it easier for both professional and retail investors to invest in funds dedicated to long-term investments in innovative projects and companies. Key changes include differentiating between ELTIFs marketed to retail and professional investors, removing barriers to retail access and establishing an optional liquidity window mechanism for redemptions.

The ELTIF must be an EU AIF managed by an AIFM that is authorised under the AIFMD.

Key elements of the draft RTS:

Minimum holding period - to offer redemptions during the life of the ELTIF, the AIFM will be required to demonstrate to the NCA of the ELTIF, based on the criteria set out in the RTS, the appropriateness of the duration of the minimum holding period and its compatibility with the ELTIF’s valuation procedures and redemption policy.

Redemption frequency - ELTIFs will not be able to facilitate redemptions more frequently than quarterly unless the AIFM can justify to the NCA of the ELTIF why more frequent redemptions would be more appropriate. This justification will be based on the individual features of the ELTIF and the actual possibility to have a reliable, sound and updated valuation of the assets of the ELTIF.

Redemption notice periods - a minimum notice period of 12 month for redemptions with the option of shorter notice periods to be determined by the AIFM based on the liquidity profile of the assets of the ELTIF. Notice periods of less than one year will be subject to holding a minimum percentage of liquid assets, and at the same time, being allowed only to redeem a maximum percentage of liquid assets (in accordance with the table set out in Article 4). Some exemptions from the requirements are available for ELTIFs marketed solely to professional investors.

Liquidity management tools - where redemptions are offered, the AIFM should select and implement at least one anti-dilution liquidity management tool, which could be anti-dilution levies, swing pricing or redemption fees, as well as redemption gates in prescribed circumstances. The AIFM can also explain to the NCA of the ELTIF why other liquidity tools would be more appropriate. Some exemptions from the requirements are available for ELTIFs marketed solely to professional investors.

Matching transfer requests - ESMA has adopted a principle-based approach to the full or partial matching of transfer requests by existing investors with transfer requests from potential investors. The relevant rules and procedures, which should be appropriate for the ELTIF, must be set out in the constitutional documents or prospectus of the ELTIF. Where the ELTIF also provides for redemptions during the lifetime of the ELTIF, such differences should be explained.

Next steps - The Commission has three months to decide whether to adopt or reject the RTS (extendable by one month). If adopted, the RTS will enter into force on the day following their publication in the OJ.

Feedback is also expected from the CBI on its consultation on a proposed new ELTIF chapter of the AIF Rulebook (CP 155), which will enable the authorisation of ELTIFs in Ireland using Ireland’s popular regulated fund vehicles, including the ICAV.

ESMA updates timeline for its guidelines on ESG and sustainability-related terms in fund names  

ESMA released an update on the status of ESMA’s guidelines on ESG and sustainability-related terms in fund names (the guidelines), including details on the timing of their publication.

Since the launch of the work on the guidelines, the AIFMD and UCITS Directive reviews have progressed. ESMA has decided to postpone the adoption of the guidelines to ensure that the outcome of these reviews may be fully considered. In particular, the text of the provisional agreement resulting from the interinstitutional negotiations contains two new mandates for ESMA to develop guidelines specifying the circumstances where the name of an AIF or UCITS is unclear, unfair, or misleading. ESMA plans to adopt the guidelines shortly after the date of entry into force of those amended legal texts. 

The guidelines are expected to be approved and published in Q2 2024, subject to the timing of the publication of the AIFMD and UCITS Directive revised texts. The guidelines would apply three months after the date of their publication on the ESMA website in all EU official languages.

Managers of new funds would be expected to comply with the guidelines in respect of those funds from the date of application of the guidelines. Managers of funds existing before the date of application of the guidelines should comply with the guidelines in respect of those funds six months from the application date.

FSB and IOSCO publish policies to address vulnerabilities from liquidity mismatch in OEFs 

The revised FSB recommendations are addressed to financial regulatory and supervisory authorities. They set out the key objectives for an effective regulatory and supervisory framework to address vulnerabilities arising from liquidity mismatch in OEFs. Combined with the LMT guidance, these recommendations aim to achieve a significant strengthening of liquidity management by OEF managers compared to current practices.

To address structural liquidity mismatch in OEFs, the revised FSB recommendations provide greater clarity on the redemption terms that OEFs can offer to investors, based on the liquidity of the OEF asset holdings. This would be achieved through a categorisation approach, where OEFs would be grouped depending on the liquidity of their assets (such as liquid, less liquid, illiquid). OEFs in each category would then be subject to specific expectations in terms of their redemption terms and conditions. Authorities should set expectations for OEF managers to use a mixture of quantitative and qualitative factors when determining the liquidity of OEF assets in normal and stressed market conditions within the context of the domestic liquidity framework set out by authorities. The revised FSB recommendations seek to achieve greater inclusion of anti-dilution LMTs in OEF constitutional documents and also greater use of, and greater consistency in the use of, anti-dilution LMTs in both normal and stressed market conditions.

To support these objectives and ensure more effective liquidity risk management practices, IOSCO’s LMT guidance provides detailed guidance on the design and use of anti-dilution LMTs by OEF managers. The LMT guidance aims to support the greater use of anti-dilution LMTs by OEFs to mitigate investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs.

The LMT guidance sets out key operational, design, oversight, disclosure and other factors and parameters that responsible entities should consider when anti-dilution LMTs are used, to promote greater, more consistent, and more effective use of these tools. For example, responsible entities should have appropriate internal systems, procedures and controls in place at all times in compliance with applicable regulatory requirements for the design and use of anti-dilution LMTs as part of the everyday liquidity risk management of their OEFs. Furthermore, anti-dilution LMTs used by responsible entities should impose on subscribing and redeeming investors the estimated cost of liquidity. This encompasses the explicit and implicit transaction costs of subscriptions or redemptions, including any significant market impact of asset purchases or sales to meet those subscriptions or redemptions.

Positive refinements include that IOSCO Guidance 2 no longer requires all funds to have at least one anti-dilution LMT and instead states “responsible entities should consider and use appropriate anti-dilution LMTs for OEFs under management (where appropriate as per the explanatory text set out below)”. Also, in Guidance 5, the role of the depositary and external auditor has been updated such that they now should “review the implementation of the processes put in place for the use of anti-dilution LMTs” as opposed to the effectiveness of the processes.

Looking ahead, IOSCO will consider how to further operationalise the revised FSB recommendations through amendments to the 2018 IOSCO recommendations and supporting good practices, as needed. The FSB and IOSCO will, by 2028, assess whether implemented reforms have sufficiently addressed risks to financial stability. This will include, if appropriate, assessing whether to refine existing tools or develop additional tools for use by fund managers or authorities.

IOSCO is expected to release a further consultation on quantity based LMTs later this year.

Benchmark Regulation

ESMA published an updated statement (last updated in March 2021) on the consequences of Brexit for the ESMA register for benchmark administrators and third country benchmarks under the Benchmarks Regulation (BMR). The statement sets out the EU's regulatory approach to UK-based third-country benchmarks as well as UK endorsed and recognised benchmarks.

In October 2023, the BMR transitional period was extended to 31 December 2025. During the BMR transitional period, third country benchmarks can still be used by supervised entities in the EU if the benchmark is already used in the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund. This allows third country UK-based benchmarks to be used (even if they are not included in the ESMA register). Similarly, during the BMR transitional period, deletion from the ESMA register does not impact the ability of EU supervised entities to use those third country benchmarks that were endorsed or recognised in the UK before the end of the Brexit transition period. In the absence of equivalence decisions by the Commission, UK-based administrators and third country benchmarks previously endorsed or recognised in the UK have until the end of the extended transitional period to apply for recognition or endorsement in the EU.

On 15 December 2023, ESMA published an updated version of its Q&As on the BMR with updated answers to:

  • Q&A 4.4 on the application of the BMR outside the EU under Article 2(1) of the BMR
  • Q&A 9.3 on transitional provisions applicable to third country benchmarks under Article 51(5) of the BMR

On 20 December 2023, the Council of the EU published a press release announcing that it has agreed its negotiating mandate on the proposed regulation amending the BMR as regards the scope of the rules for benchmarks, the use in the EU of benchmarks provided by an administrator located in a third country and certain reporting requirements. The proposed regulation (adopted by the Commission in October 2023) aims to reduce the regulatory burden on administrators of benchmarks that are not economically significant in the EU by removing them from the scope of the current regime under the BMR. It also aims to simplify the current approach to non-EU country benchmarks in the EU. The press release explains that:

  • Only the following benchmarks should remain within the scope of regulation:
    • benchmarks designated as critical
    • benchmarks designated as significant (either by meeting a quantitative threshold or by designation of the NCA concerned or by ESMA)
    • EU Paris-aligned benchmarks
    • EU climate transition benchmarks
    • certain commodity benchmarks (subject to Annex II). The regulatory treatment of commodity benchmarks should be tailored to their specific characteristics
  • The Council advises that administrators of the benchmarks that are authorised, registered, endorsed or recognised on the date of application of the proposed regulation should not be obliged to re-apply for authorisation, registration, recognition or endorsement.

On 15 January 2024, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a draft report on the European Commission's legislative proposal.

The draft report contains a draft European Parliament legislative resolution, the text of which sets out suggested amendments to the proposed Regulation. The proposed regulation is to apply from 1 January 2026.

ESMA’s sixth market report on the costs and performance of EU retail investment products

ESMA published its sixth market report on the costs and performance of EU retail investment products. In this annual report ESMA finds that the average costs of investing in key EU retail financial products has declined by the end of 2022. However, cost heterogeneity persisted across EU Member States.

Verena Ross, ESMA Chair, said: 

“ESMA’s annual reporting on the costs and performance of retail investment products provides a clear overview and shows developments across the EU markets. Costs and performance are key determinants of whether retail investors benefit from their investments, and whilst it is to be welcomed that the cost incurred by investors has slowly declined, retail investors still need to consider costs carefully in their investment decisions.”

“In 2022, investors were faced with a difficult environment characterised by lower returns and elevated level of inflation, accentuating the importance of the level of costs.  Clear, comprehensive and comparable information on retail investment products can help investors assess the past performance and costs of products offered across the EU and assist them in making well-informed investment choices.”

The key findings in the report are:

  • UCITS Costs: Costs have declined, but investors should continue to consider fund fees carefully in their investment decisions. Despite costs of active equity funds decreasing, this category of funds remained more expensive than passive funds and ETFs, such that their net performance was on average lower in comparison. 
  • Investment value and value-for-money: Investors paid around €2,000 in costs for an investment in UCITS of €10,000 over ten years. The returns of the market led to a net value of €14,850 after this period, and to a net real value of €13,500, when inflation is taken into account. 
  • ESG UCITS: ESG funds underperformed on average their non-ESG equivalents in 2022, a likely consequence of the energy crisis. However, ESG funds still outperformed their non-ESG equivalents on the three-year investment horizon. In 2022, ongoing costs of ESG funds were lower than or similar to the ongoing costs of non-ESG equivalents.
  • Alternative Investment Funds (AIFs): The market for AIFs remained dominated by professional investors with the share of retail investors reaching around 14% at the end of 2022. Retail investors invested mainly in funds of funds, “other” AIFs and real estate funds. Among those three categories of funds, real estate funds were the only category with positive gross and net returns in 2022. However, real estate markets face significant challenges since 2022, which is likely to affect the performance of real estate funds going forward, given the further increase of interest rates in 2023.
  • Structured Retail Products (SRPs): Costs, largely charged in the form of entry costs, rose in 2022 for a majority of product types and issuers, although they vary substantially by payoff type and country. The analysis of performance scenarios shows that the returns of one in eight SRPs would be negative even in a moderate scenario. 

Costs and performance of retail investment products are key determinants of the benefits for retail investors in the EU. Clear and comprehensive information on retail investment products can help investors assess the past performance and costs of products offered across the EU and foster retail investor participation in capital markets.

ESMA’s report helps to monitor progress in this regard by providing consistent EU-wide information on cost and performance of retail investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MiFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors, as laid down in MiFID II, and the UCITS and AIFM Directives.

Fund registrations - RTS/ITS for cross border notifications

On 15 December 2023, the Commission adopted draft legislation relating to the UCITS Directive and the AIFMD comprising RTS and ITS for cross border notifications.

  • Delegated regulation supplementing the AIFMD with RTS specifying the information to be notified in relation to the cross-border activities of AIFMs. The delegated regulation sets out the information that should be communicated by AIFMs to NCAs under Article 33 of the AIFMD.
  • Delegated regulation supplementing the UCITS Directive with RTS specifying the information to be notified in relation to the cross-border activities of UCITS ManCos and UCITS. The delegated regulation sets out the information that should be communicated by UCITS ManCos and UCITS to NCAs under Articles 17, 18 and 20 of the UCITS Directive.
  • Implementing regulation laying down ITS for the application of the AIFMD with the form and content of the information to be notified in respect of the cross-border activities of AIFMs and the exchange of information between NCAs on cross-border notification letters. Template notifications are set out in Annexes I, II, III, IV and V to the implementing regulation.
  • Implementing regulation laying down ITS for the application of the UCITS Directive with the form and content of the information to be notified in respect of the cross-border activities of UCITS, UCITS ManCos, the exchange of information between NCAs on cross-border notification letters and amending Regulation 584/2010. Template notifications are set out in in Annexes I, II, III, IV, V, VI and VII to the Implementing Regulation.

The Council of the EU and the European Parliament will scrutinise the draft legislation. If neither object, they will enter into force 20 days after publication in the OJ and apply either 30 days or three months later (this will become clear when the regulations are published in the OJ). The legislation reflects a December 2022 report by ESMA on how improve cross-border notifications.

EMIR Reporting

As part of EMIR Refit, ESMA was mandated to develop new reporting technical standards and to align the reporting methodology with SFTR and MiFIR by requiring the use of ISO 20022 XML methodology.

New Level 2 EMIR Refit measures were adopted by the Commission in June 2022 and will apply from 29 April 2024:

  • Commission Delegated Regulation (EU) 2022/1855 of 10 June 2022 supplementing EMIR with RTS specifying the minimum details of the data to be reported to trade repositories and the type of reports to be used.
  • Commission Implementing Regulation (EU) No 2022/1860 of 10 June 2022 repeals Implementing Regulation (EU) No 1247/2012 and introduces a new requirement for an entity that is responsible for reporting under EMIR (this includes a UCITS management company or AIFM) to notify its NCA, and, if different, the NCA of the reporting counterparty (UCITS/AIF), of certain types of significant misreporting errors or omissions, as soon as it becomes aware of them. ESMA published a template for submitting these notifications to the NCAs that have decided to adhere to this template. Notifications to NCAs should be reported in accordance with the procedures adopted by each relevant Member State.

Amended EMIR reporting rules set out in ESMA’s guidelines for reporting under EMIR (published on 14 December 2022) will also apply from 29 April 2024.

The CBI has previously set out its expectations for data reporting in a 2019 industry letter and in its Securities and Markets Risk Outlooks Reports, as well as issuing guidance.

You can read about the CBI’s recent enforcement action under EMIR, highlighting the importance of timely data reporting, here.

ESAs propose extending the EMIR equity option exemption 

The ESAs published joint draft regulatory technical standards (RTS) under the European Market Infrastructure Regulation (EMIR) where they are proposing a two-year extension to the equity option exemption from bilateral margining, as well as issuing a no-action opinion. The draft RTS clarify how to handle equity options as from 4 January 2024, the date on which the current temporary exemption is set to expire. The ESAs are proposing to extend the temporary exemption and are issuing a no-action Opinion which includes clarifications on the supervisory expectations. This interim solution comes in the context of the still ongoing EMIR review and follows the letter sent by the ESAs on 13 June 2023 to the European Commission and the co-legislators, highlighting the need to have a clear decision as part of the ongoing EMIR Review.

MMF stress testing update

ESMA published the final report on its guidelines on stress test scenarios under the Money Market Funds Regulation.

The new 2023 parameters and the revised methodology will apply two months after the publication of translations of the guidelines. After the start of the application of the updated guidelines, managers will have to report the results of the new parameters to NCAs with their quarterly reports. Until then, managers should use the parameters set in the 2022 Guidelines and report the results accordingly.

European Commission draft notice (with FAQs) on the Disclosures Delegated Act under the Taxonomy Regulation

On 21 December 2023, the European Commission published a Draft Commission Notice on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of the EU taxonomy Regulation on the reporting of taxonomy-eligible and Taxonomy-aligned economic activities and assets (europa.eu). The draft notice sets out additional guidance responding to frequently asked questions on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act ((EU) 2021/2178) made under Article 8 of the EU Taxonomy Regulation ((EU) 2020/852) on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets. The guidance is intended to help the financial market participants concerned prepare their first mandatory reporting exercise in 2024. It:

  • Covers the reporting obligations of large financial undertakings and financial undertakings admitted to trading on EU markets relating to how they finance, invest in or insure taxonomy-aligned activities.
  • Clarifies the scope of entities subject to the reporting obligations, the taxonomy assessment of specific exposures such as to retail clients, local authorities and exposures to individual undertakings and groups.
  • Considers the rules regarding the verification and evidence of compliance with the EU taxonomy, and targeted questions specifically related to credit institutions, insurance undertakings, and asset managers.

The draft notice states was approved in principle by the Commission on 21 December 2023. Its formal adoption in all the official languages of the EU will take place as soon as the language versions are available.

Two related notices were published in October 2023:

MiFID II pre-trade controls

On 11 January 2024, ESMA announced that it had launched a common supervisory action (CSA) with national competent authorities (NCAs) to assess the implementation of pre-trade controls (PTCs) by EU investment firms using algorithmic trading techniques. ESMA and NCAs will carry out the CSA in the course of 2024.

This initiative and the related sharing of practices across NCAs aim at ensuring consistent application of EU rules, helping to promote stable and orderly markets. The rules governing the use of PTCs are set out in MiFID II and more specifically in commission delegated regulation 2017/589 (RTS 6) which specifies the organisational requirements of investment firms engaged in algorithmic trading.

MiFID II discussion paper on digitalisation of retail investment services

ESMA published a discussion paper on the digitalisation of retail investment services and related investor protection considerations. ESMA is seeking stakeholders input by 14 March 2024 on recommendations regarding online disclosures, digital tools, and marketing practices.

In the discussion paper ESMA explores the evolving landscape of retail investments. This includes examining the recent surge in the adoption of digital tools and social media by firms and retail investors following the Covid-19 pandemic, and an exploration of how technology impacts retail investor behaviour and decision-making. Based on the supervisory experience of the NCAs and relevant academic literature, ESMA assesses both the opportunities and the potential risks linked to digitalisation.

ESMA's recommendations cover the following main topics:

  • layering and accessibility of information
  • digital marketing communications and practices
  • the use of influencers
  • Social features of investment apps 
  • gamification 
  • nudging techniques 
  • dark patterns

These insights will enrich ESMA’s view on how to foster investor protection while harnessing the benefits of innovation. The feedback to this discussion paper will support ESMA’s convergence work and prepare it for potential mandates for technical advice/standards in these areas.

CSRD consultation

ESMA launched a consultation on a set of draft guidelines on Enforcement of Sustainability Information, closing 15 March 2024. The consultation paper will be of interest to listed companies required to publish sustainability information by the CSRD and Article 8 of the Taxonomy Regulation, to investors and other users of sustainability information and to auditors and independent assurance services providers. 

The main goals of the draft guidelines are to: 

  • Ensure that NCAs carry out their supervision of listed companies’ sustainability information under the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) and Article 8 of the Taxonomy Regulation in a converged manner.
  • Establish consistency in, and equally robust approaches to, the supervision of listed companies’ sustainability and financial information; this will facilitate increased connectivity between the two types of reporting.

ESMA expects to publish the final Guidelines in Q3 2024. 

ESAP (European single access point) legislation

Three pieces of legislation relating to the ESAP were published in the OJ on 20 December 2023. The ESAP legislation comprises an EU Regulation establishing the ESAP (the ESAP Regulation), together with an Omnibus Regulation and an amending Omnibus Directive to amend the in-scope EU directives and regulations in order to provide for the disclosure obligations relating to the ESAP. 

The ESAP will be a ‘single point of access’ platform for public financial, non-financial and sustainability-related information about EU entities and EU financial products and it will be operated by ESMA. The ESAP does not impose any additional information reporting requirements on EU entities, as the ESAP will provide access to information already made public under a range of existing EU directives and regulations that are specifically referenced within the ESAP legislation. 

Under the ESAP framework, EU entities that are required to report under the in-scope EU regulations and directives will have an additional obligation to provide information to their national collection body. This will be done on a phased basis. In practice, this means that any information, document or report made public under EU law by an entity (including credit institutions, credit rating agencies, funds, central counterparties, central securities depositories, issuers of securities, auditors, as applicable) will have to be submitted to the collection body in a data extractable format or in a machine-readable format, where relevant, simultaneously with their publication in accordance with the relevant EU law. 

ESMA has launched a consultation. It is required to establish and operationalise the ESAP by 10 July 2027.

AML/CFT/FS

EU list of high-risk third countries

Commission Delegated Regulation (EU) 2024/163 of 12 December 2023 amending Delegated Regulation (EU) 2016/1675 as regards the deletion of the Cayman Islands and Jordan from the table in point I of the Annex (europa.eu) will enter into force on 7 February (20 days after publication on 18 January 2024).

This reflects FATF's removal of the Cayman Islands and Jordan from its grey list in October 2023.

EU Anti-money-laundering authority

A new anti-money-laundering authority (AMLA) will be set up to improve AML/CFT supervision in the EU and support cooperation between FIUs. AMLA will strengthen the EU’s AML/CFT framework by creating an integrated mechanism with national supervisors in the member states to ensure that obliged entities comply with their obligations. On 18 December 2023, Council and Parliament representatives reached a common understanding on the process for selecting the seat of AMLA.

The press release states that nine member states have submitted applications to host the AMLA: Belgium (Brussels), Germany (Frankfurt), Ireland (Dublin), Spain (Madrid), France (Paris), Italy (Rome), Latvia (Riga), Lithuania (Vilnius) and Austria (Vienna). The Commission is expected to publish its assessment of the candidates' eligibility in January 2024. The next step will be to proceed with the selection. Once the location of the seat has been selected, it will be included in the proposed AMLA Regulation and formally adopted as part of the text.

EU AML/CFT Package

The Council and Parliament struck a deal on new legislative package. Press release is here. Of particular interest:

  • The beneficial ownership threshold remains at 25%.
  • On beneficial ownership registers, entities or arrangements that are associated with persons or entities subject to targeted financial sanctions will need to be flagged.

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 1 February 2024