Fund Management

The European Securities and Markets Authority (ESMA) has found that national regulators need to improve their supervision of Undertakings for Collective Investments in Transferable Securities (UCITS) engaging in efficient portfolio management techniques (EPM). A recent peer review by ESMA, which assessed the level of compliance of six national competent authorities (NCAs) with its Guidelines on EPM, found a number of shortcomings in certain NCAs’ approaches when supervising the use of EPM by UCITS. 

ESMA identifies shortcomings in the application and supervision of the Guidelines

ESMA’s peer review assessed six NCAs from Estonia, France, Germany, Ireland, Luxembourg, and the United Kingdom. Based on the Guidelines, besides identifying some good practices, ESMA found deficiencies in the national supervision of UCITS engaging in EPM. The findings of the peer review relate in particular to the supervisory practices regarding operational aspects of costs, fees and revenues for EPM, and collateral management issues. In particular, ESMA calls for NCAs to:

  • ensure a more systematic and formalised review of the required EPM disclosures, allowing investors to better understand funds’ EPM engagement, the risks involved, and the cost and fee policy concerning EPM. This finding is relevant for all reviewed NCAs, and in particular for Estonia and the UK;
  • provide more comprehensive internal supervisory guidance on costs, fees and revenues regarding EPM. This finding is relevant for all reviewed NCAs;
  • ensure that all net revenues from EPM are returned to the investors. This finding is particularly relevant for Germany and Luxembourg regarding revenue splits between investors, fund managers and their service providers; and
  • revise existing national exemptions to the Guidelines on collateral requirements granted in the UK and Germany so that fund assets can only be used for EPM purposes where UCITS receive high-quality and liquid collateral in accordance with the standards set out in the ESMA Guidelines.

Steven Maijoor, Chair, said:

“This is an important stock-take revealing both good practices and areas where improvements are needed. Ensuring that the use of efficient portfolio management by UCITS is sound and not detrimental to the protection of investors, is important.

“In order to increase supervisory convergence in this important area, ESMA has asked NCAs to amend their supervisory practices in specific areas – as a true level playing field is built on consistent application and supervision of the rules.”

ESMA also identified good practices

The ESMA peer review also identified good practices, in particular focusing on:

  • data-driven supervision to help identify areas on which to concentrate resources; as well as
  • bespoke reporting tools to provide support to and augment oversight of UCITS and their adherence to the Guidelines.

Next steps

A number of NCAs have already informed ESMA of their intention to revise their practices to address ESMA’s findings. ESMA will follow up on the findings of this peer review in 24 months to assess the progress made by NCAs.

Background

ESMA’s Guidelines on ETFs and other UCITS issues provide rules on the use of EPM by UCITS. UCITS are permitted to engage in EPM in order to reduce risk and costs, or generate additional capital or income. However, such activity should be in line with the funds’ risk profiles and respect the rules laid down in ESMA’s Guidelines. A number of activities can fall under EPM, such as securities lending, and engaging in (reverse) repurchase agreements, and certain financial derivatives. 

The European Securities and Markets Authority (ESMA) has today updated its Questions and Answers on the application of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD).

The Q&A documents include new questions and answers on:

  • UCITS investing in other UCITS with different investment policies;
  • Calculation of issuer concentration limits pursuant to Article 52 of the UCITS Directive;
  • Reuse of assets by a UCITS depositary under Article 22(7) of the UCITS Directive; and
  • The supervision of branches of UCITS Management Companies or AIFMs providing MiFID investment services.

The purpose of these Q&A documents is to promote common supervisory approaches and practices in the application of the UCITS Directive and AIFMD and their implementing measures.

ESMA will periodically review these Q&A documents and update them where required.

The European Securities and Markets Authority (ESMA) has written to the European Commission asking it to provide clarity to market participants and investors on the issue of the compatibility of the reverse distribution mechanism (RDM), or share cancellation, with the Money Market Funds Regulation (MMFR).

ESMA believes that clarity on this issue to investors and market participants is essential to ensure a proper and consistent interpretation and implementation of the MMFR.

TEXT OF LETTER

Ref: Implementation of the MMF Regulation – your letter dated 19 January 2018

Dear Vice-President Dombrovskis,

I am writing to you regarding your letter dated 19 January 2018 on the implementation of the MMF Regulation.

I would like to thank you for your letter and the publication of the Commission Implementation Regulation 2018/708 of 17 April 2018 laying down implementing technical standards with regard to the template to be used by managers of money market funds when reporting to competent authorities as stipulated by Article 37 of the MMF Regulation (MMFR).

I would also like to thank you for providing us in this letter of 19 January 2018 with the view of the Commission on the compatibility of the reverse distribution mechanism (RDM), often referred to as ‘share cancellation’, with the MMFR. As you will recall, we considered the assessment of the compatibility of the RDM with the MMFR a Level 1 issue and therefore asked for your view on this matter. Clarity on this issue to investors and market participants is essential to ensure a proper and consistent interpretation and implementation of the MMFR.

I understand that you have provided some market participants with the text of the opinion of the Legal Service of the Commission on the compatibility of the RDM with the MMFR. In order to ensure clarity and transparency vis-à-vis market participants and investors on this issue, I would see merit in the Commission making its interpretation of the relevant provisions in the MMFR clear to the wider public through means of communication deemed most appropriate.

Given the MMFR will apply from 21 July 2018, the date from which all newly authorised MMFs will have to comply with the Regulation, I would see merit in making this interpretation clear to the wider public as soon as possible.

 

The European Securities and Markets Authority (ESMA) held a supervisors’ workshop for National Competent Authorities (NCAs) on 27 June to promote supervisory convergence in NCAs’ supervision of closet indexing.

Closet indexing is a practice whereby asset managers claim to manage their funds in an active manner whilst in fact staying very close to a benchmark and charging management fees in line with actively managed funds.

The workshop follows ESMA’s Public Statement on Supervisory Work on Potential Closet Indexing Tracking from February 2016 and its coordination with NCAs to get a comprehensive picture of the outcome of their national initiatives.

The workshop’s objective was to enhance supervisory convergence in the supervision of closet indexing by facilitating insights and good practices amongst peers.  It did this by bringing together experts from a number of NCAs, who shared techniques, experiences and exchanged views on overcoming some of the key challenges faced when undertaking investigations.

Steven Maijoor, Chair, said:

“This was a well attended and successful event, in which supervisors from across the European Union shared key insights into the topic and exchanged views with their peers for the benefit of all NCAs’ supervision of this issue.

“The workshop demonstrates ESMA’s sustained commitment to addressing this risk. Furthermore, this commitment is mirrored by the significant amount of work carried out at national level by a number of NCAs, some of which has already been disclosed to stakeholders.

“ESMA will continue to play a role coordinating NCAs work in this area and promoting their increased level of focus on this topic. We will also continue to assess the need for further measures to enhance supervisory convergence to ensure that investors are treated fairly across all Member States.”

The Q&A document includes one new question and answer on:

  • the application of remuneration disclosure requirements to staff of the delegate of an UCITS management company to whom investment management functions have been delegated.

The purpose of this Q&A document is to promote common supervisory approaches and practices in the application of the UCITS Directive and its implementing measures.

ESMA will periodically review this Q&A document and update it where required.

The European Securities and Markets Authority (ESMA) has issued today the official translations of its Guidelines on stress tests scenarios under Article 28 of the MMF Regulation.

National Competent Authorities (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.

Guidelines on stress tests scenarios under Article 28 of the MMF Regulation

BG  - Преводът е предоставен от Центъра за преводи за органите на Европейския съюз.

CS - Tento překlad vypracovalo Překladatelské středisko pro instituce Evropské unie.

DA - Denne oversættelse er udarbejdet af Oversættelsescentret for Den Europæiske Unions Organer.

DE - Die Übersetzung erfolgte durch das Übersetzungszentrum für die Einrichtungen der Europäischen Union.

EL - Η παρούσα μετάφραση έγινε από το Μεταφραστικό Κέντρο των Οργάνων της Ευρωπαϊκής Ένωσης.

ES - Texto traducido por el Centro de Traducción de los Órganos de la Unión Europea.