Memo #
33948

European Commission Issues CMU Package; Summary of AIFMD/UCITS Review Proposal
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[33948]

December 9, 2021

TO: ICI Members
ICI Global Members SUBJECTS: International/Global
MiFID, EMIR, AIFMD, UCITS V RE: European Commission Issues CMU Package; Summary of AIFMD/UCITS Review Proposal

 

Capital Markets Union Legislative Package

On November 25, the European Commission issued its proposal on four legislative files, collectively referred to as the "CMU Package." As part of the formal process in the better regulation framework, the Commission has opened a feedback period for each of these proposals until February 2, 2022.

Links to the legislative proposals and response pages for each file are provided below. A summary of the AFIMD/UCITS Review proposal follows.

AIFMD/UCITS Review Proposal

The Commission's proposal for amendments to the AIFMD and UCITS Directive focuses on delegation, financial stability, supervision, a loan origination framework, location of depositary, and reporting. The limited number of subjects included in the proposal reflects the Commission's overall assessment that the AIFMD is generally meeting its objectives and that the EU-wide harmonization of regulatory standards has facilitated integration of the European collective investment fund market. However, although limited in number of topics, the proposed changes to the AIFMD and UCITS Directive could have a significant impact on global regulated fund managers. The proposed changes, with a focus on those impacting UCITS, are described below.

The proposal now must be negotiated and agreed among the Commission, Council, and European Parliament; agreement is unlikely to occur before early 2023. Once agreement has been reached, the amendments will enter into force 20 days after publication in the Official Journal of the European Union, and Member States will be required to transpose the provisions into national law within two years after entry into force.  

Delegation Regime

Although the Commission recognizes that the delegation regime in the AIFMD and UCITS Directive allows for the efficient management of investment portfolios and for accessing necessary expertise in a particular market or asset class, and that this model contributes to the success of the EU fund and manager labels, its evaluation of the existing framework concludes that different national supervisory practices create inconsistencies that may reduce overall investor protection. The Commission further states that "Insufficient clarity of the applicable regulatory standards reduces legal certainty, increases divergence in supervisory outcomes, and ultimately fails to ensure a uniform level of investor protection across the Union."

To address these concerns, the Commission proposes the following changes:

  • Minimum substance requirement of two people in the European Union (AIFMD Article 8(1)(c); UCITS Article 7(1)(b) and 29(1))
  • Alternative investment fund managers (AIFMs) and UCITS Management Companies (ManCos) required to provide additional, detailed information when applying for authorization, including information on technical resources, persons conducting the work of the AIFM/ManCo, and resources for monitoring delegation (AIFMD Article 7(2); UCITS Article 7(1)(c, e))
  • European Securities and Markets Authority (ESMA) to develop regulatory technical standards on delegation notifications, including the content, forms, templates and procedures (AIFMD Article 7(8); UCITS Article 13(4), Article 112a(1))
  • ESMA to analyze delegation market practices for delegation to entities located in third countries and to present, at least every two years, a report to the Council and European Parliament (AIFMD Article 7(9); UCITS Article 13(5))
  • ESMA to conduct, at least every two years, peer reviews of the delegation regime (AIFMD Article 38a; UCITS Article 101a)
  • Clarification that the delegation rules apply both to functions as well as ancillary services (AIFMD Article 20(1, 1f, 3, 4, 6); UCITS Article 13(1)(g-i), 13(2))
  • Carryover of existing AIFMD delegation requirements to UCITS Directive (UCITS Article 13(1)(b, j), 13(6))

Financial Stability (Liquidity Management Tools)

The current AIFMD and UCITS Directive do not provide for a minimum harmonized set of liquidity management tools (LMTs), and both the European Systemic Risk Board (ESRB) and ESMA recommended harmonization of the rules on the use of LMTs. To address this issue, the Commission's proposal includes measures regarding the availability and use of LMTs during times of market stress. The Commission states that the possibility to activate LMTs can protect the value of investors' money, reduce liquidity pressure on the fund, and mitigate against broader systemic risk implications in situations of market-wide stress.

The Commission's proposed changes are the following:

  • Member States to ensure that open-ended alternative investment fund (AIFs) and UCITS have available to them at least one LMT in addition to suspensions (AIFMD Article 16(2b-c, e); UCITS Article 18a)
  • AIFs and UCITS required to notify their national competent authority (NCA) when activating or deactivating a LMT (AIFMD Article 16(2d); UCITS Article 84(3))
  • Authority given to NCAs to require AIFMs/ManCos to activate or deactivate a LMT (AIFMD Article 46(2)(j); UCITS Article 84(2)), with ESMA drafting regulatory technical standards on the situations in which NCAs can use this power (AIFMD Article 50(7); UCITS Article 84(3f)).
  • Power given to ESMA to request activation or deactivation of a LMT for non-EU AIFMs or AIFs (AIFMD Article 47(4)(d))
  • Power given to other NCAs to request the activation or deactivation of LMTs by the home NCA (AIFMD Article 50(5b-5g); UCITS Article 84(3a-3e))
  • Inclusion of an Annex providing a list of LMTs for open-ended AIFs and UCITS, and requirement for ESMA to develop regulatory technical standards on the characteristics of these tools, as well as the criteria for their selection and use (AIFMD Article 16(f-g); UCITS Article 16a)
  • Reporting to investors on possibility and conditions for LMT use (AIFMD Article 23(1)(h))
  • Power given to UCITS host NCA to request home NCA to conduct a supervisory investigation if there are potential financial stability risks (UCITS Article 98(3-4)

Reporting and Supervision

The Commission states that its review found that the market data submitted to the supervisory authorities has gaps or lacks the detail that is needed, thereby impairing the authorities' ability to identify the build-up and spill over of risks to the broader financial system. The proposal thus incudes changes that aim to improve the relevant data collection and remove inefficient reporting duplications that may exist under other pieces of the European and national legislation in line with the wider strategy on supervisory data (as announced in the Digital Finance Strategy). 

To address this issue, the Commission proposes the following:

  • Requirement for additional disclosures to investors, including a list of all fees and charges, originated loan portfolio, and related parent company, subsidiary or special purpose entity (AIFMD Article 23(1)(ia) and 23(4)(d-f)
  • Expansion of reporting obligations to NCAs, including on all markets, instruments and exposures (AIFMD Article 24(1); UCITS Article 20a)
  • Requirement for ESMA to draft detailed reporting requirements, including on format, data standards and frequency of reporting (AIFMD Article 24(6-7); UCITS Article 20a)
  • Permission for ESMA to disclose market data, in aggregate or summary form (AIFMD Article 47(3))
  • Relaxation of the requirements for NCAs to notify ESMA regarding concerns of the supervision of another competent authority (AIFMD Article 50(5))

Additional Proposed Changes to the AIFMD

The Commission's proposal includes certain changes applicable only to AIFMs in the areas of loan origination, depositary services, ancillary activities, and the EU tax blacklist. 

 

Eva M. Mykolenko
Associate Chief Counsel - Securities Regulation