The European Commission (“EC”) published its much-anticipated proposal to review the AIFMD/UCITS frameworks on Thursday, 25 November 2021. Broadly, the EC is proposing changes to UCITS rules on delegation, liquidity risk management and reporting to align with AIFMD rules.
Of particular note are the EC’s pronouncements on delegation – it has indicated that it is not going to adopt certain delegation measures proposed by ESMA in a letter last year. This letter, among other measures, proposed the development of a list of functions which could not be delegated by managers and proposed quantitative limits on delegation. Our previous note on this topic can be accessed here.
The EC’s review does not propose wholesale changes to the current delegation framework:
Delegation of both portfolio and risk management functions is expected to continue. Further administrative and supervisory requirements will be introduced along with an obligation to employ two EU-based residents. It is also recognised that managers may delegate more portfolio management or risk management than they retain. The EC noted in its impact assessment, which was published alongside the proposal, that “a fundamental change to the AIFMD delegation rules is not necessary and the legitimate use of delegation must be preserved”, noting that the proper use of delegation arrangements have “clear benefits for EU managers and investors”.
Managers will also be asked to designate individuals who are responsible for key managerial functions and ensure entities are staffed by at least two full-time individuals. It should be noted that as an outcome of its CP86 review, the Central Bank of Ireland requires all Irish authorised asset managers to have at least three full-time employees.
Further initiatives proposed by the EC on delegation include:
- Applying delegation rules to all regulated activities, including ancillary services.
- A peer review will be conducted by ESMA every two years analysing market practices regarding delegation to third country entities.
- A notification requirement for national supervisory authorities to EMSA with prescribed information on delegation arrangements where a ManCo delegates to third countries more portfolio management or risk management than it retains.
The fact that the EC’s proposals focus on administrative and supervision requirements rather than restrictions on delegation is a positive development.
Some other key items identified as part of the review are as follows:
- Liquidity risk management is centre stage in the review which is not surprising given the recent history of liquidity issues in the funds industry such as the 2008 financial crisis and Covid. The EC wishes the rules on the availability and use of liquidity management tools to be harmonised across EU regulators. In addition to the ability to temporarily suspend repurchases or redemptions, managers of open-ended funds will be required to choose at least one designated liquidity risk management tool (such as redemption gates, notice periods, swing pricing and ant-dilution levies) in order to address redemption pressures under stressed market conditions and to better protect investor interests. Supervisors will be empowered to “activate or deactivate” those tools in time of stress. ESMA will also be granted authority to develop regulatory technical standards for the selection and use of liquidity risk management tools, including regarding appropriate disclosures to investors and reduction of undue advantages for first redeemers.
- There are proposed new rules on loan origination funds around fund structuring, credit assessment/monitoring, disclosures, lending policies, diversification and risk retention. The EC proposal aims to create a harmonised EU framework for AIFMs managing loan origination AIFs.
- Third country funds marketing in the EU via private placements must not be domiciled in a country listed on the EU list of non-cooperative jurisdictions for tax purposes or the EU “high-risk” third country AML blacklist.
- The EC proposes retaining the option of introducing a depositary passport. The EC wishes to dilute depositary market concentration in certain small markets. The passport is not deemed feasible at the moment given the absence of EU harmonisation of securities and insolvency laws.
- The EC proposes to develop an integrated data collection system to deliver accurate, comparable and timely data to European national supervisory authorities. The EC highlighted the importance of delivering data on leverage, liquidity profile and information on the Value at Risk (VaR) of AIFs to national supervisory authorities. This data is provided to monitor developments in the markets and address potential risks to financial stability stemming from AIFM and AIF activities. It should also be mentioned that a new addition has been proposed to the UCITS framework to require UCITS ManCos to report to their national supervisory authorities on the markets and instruments in which they trade.
The EC’s proposals are not formal legislative provisions, for the moment they are just views expressed on what new AIFMD/UCITS rules should be implemented. There may be some minor changes to the above measures once reviewed by The Council of EU Member States and the European Parliament. The final implementation of the new rules will take between 12 to 24 months so there will be no immediate changes to the current AIFMD/UCITS rules.
Download a copy of the European Commission Review of AIFMD/UCITS
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- The provision of UCITS management company/AIFM services
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