UCITS – Commission calls on ESMA to review Eligible Assets Directive

A letter from the European Commission dated 6 June 2023 (the Letter), has mandated ESMA to provide the Commission with technical advice on the review of the Eligible Assets Directive (the EAD).

What is the EAD?

To safeguard their continued success as a trusted brand for both retail and institutional investors, UCITS are restricted to investing in assets which are subject to eligibility criteria. These are intended to ensure that the UCITS is able to meet all its obligations – including portfolio liquidity, NAV calculation and limits monitoring.

The EAD specifies the scope of UCITS eligible assets.

However, the EAD has been in force since 2007 and the Commission now wants to take stock of market practices so the rules are implemented uniformly across the EU and also market and regulatory developments over the past 16 years.

What is ESMA being asked to do?

The Commission is, then, mandating ESMA to

• carry out an assessment of how Member States have diverged in their implementation of the EAD
• provide the Commission with recommendations on how to amend the EAD to keep it in line with market developments
• analyse whether there is merit in linking certain definitions and concepts to other pieces of EU law (e.g. MIFID II, EMIR, the Benchmark Regulation or the Money Market Funds Regulation) to provide greater clarity, legal certainty and uniformity to UCITS ManCos
• assess the risks and benefits of UCITS gaining exposure to asset classes that are not currently directly investable for UCITS, e.g. through delta-one instruments, (embedded) derivatives and financial indices
• advise on possible legislative clarifications in the area of efficient portfolio management, to address shortcomings flagged by ESMA’s work, notably its 2018 Peer Review on the Guidelines on ETFs and other UCITS issues and its 2021 Common Supervisory Action on costs and fees
• conduct a data gathering exercise for insights on how and to what extent UCITS have gained direct and indirect exposure to certain asset categories that may give rise to divergent interpretations and/or risk for retail investors – in this context, the Letter refers specifically to structured/leveraged loans, catastrophe bonds, emission allowances, commodities, crypto assets and unlisted equities
• make a preliminary assessment of the impacts of the proposed regulatory adjustments, if any, taking into account the characteristics of the underlying market and
• recommend to the Commission what (if any) Level 2 changes would be appropriate, as well as any amendments to Level 1 that ESMA considers “appropriate and necessary in the medium and long-term”.

What’s the timing?

To allow time for what it terms “a comprehensive public consultation”, the Letter has given ESMA until 31 October 2024 by which to deliver its technical advice.

We will be following this work and will publish a summary of the resulting consultation paper when this is published.