On 7 May 2024, ESMA published a call for evidence on the review of the Commission Directive 2007/16/EC on UCITS Eligible Assets (the “UCITS EAD”).
Background
Under Directive 2009/65/EC of 13 July 2009 (the “UCITS Directive”), a UCITS fund is permitted to invest only in specific asset classes, which include:
- bank deposits and financial derivative instruments.
- money market instruments and other investment funds,
- certain transferable securities.
The UCITS EAD complements the UCITS Directive by establishing specific criteria that an instrument must meet to be eligible for investment by a UCITS.
However, since its adoption in 2007, the range and variety of financial instruments traded on financial markets have grown significantly.
In June 2023, the European Commission requested ESMA to provide technical advice on reviewing the UCITS EAD and analyse whether any divergences have been detected.
Call for Evidence
Convergence issues and clarity of key concepts
ESMA seeks to gather evidence and views from stakeholders on the clarity of key concepts under the UCITS EAD, as well as potential interpretation and convergence issues. To this end, ESMA’s call for evidence sets out several questions which seek to ascertain stakeholders’ practical experience of the UCITS EAD. For example, there are questions relating to recurring or significant issues stakeholders may have had with the interpretation or consistent application of UCITS EAD rules on financial indices, money market instruments and with the notions of “liquidity” and “liquid financial assets”. ESMA ask stakeholders to explain their understanding of “ancillary liquid assets” and whether the “transferable security “ criteria set out in the UCITS EAD are adequate and clear enough.
Direct and indirect UCITS exposures to certain asset classes
ESMA seeks to assess possible risks and benefits of UCITS gaining exposures to asset classes on which there are divergent views as regards their eligibility as UCITS investments.
This covers both direct and indirect exposures, by way of, for example, delta-one instruments, embedded derivatives, and replications of financial indices.
The questions set out in ESMA’s call for evidence are aimed at further solidifying ESMA’s understanding of the extent to which UCITS have gained direct and indirect exposures to certain asset classes that may give rise to risk for retail investors. ESMA is interested in receiving stakeholder feedback to assess the merits of allowing UCITS to gain direct or indirect exposures to a range of asset classes, including unlisted equities, commodities, and crypto-assets.
The questions are also raised whether a look-through approach is required to determine the eligibility of assets and what are the risks and benefits of UCITS investments in securities issued by securitisation vehicles.
ESMA finally asks whether stakeholders have observed any issues with respect to the interpretation or consistent application of the UCITS EAD other than those linked to the questions specifically raised.
Next Steps
ESMA will review all feedback submitted by 7 August. Following this review, ESMA is expected to provide its final technical advice to the European Commission by 31 October 2024.
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