ESMA’s 2017 Supervisory Convergence Programme

ESMA’s 2017 Supervisory Convergence Programme

Priorities for investment management.

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ESMA’s investment management workstreams in 2017 are mainly aimed at continuation of the work started in 2016, or a follow-up of those activities.

Priorities include:

  • Common approaches to delegation of collective portfolio management and depositary functions under the UCITS Directive and AIFMD, including promoting a common understanding of the ‘substance’ requirements for UCITS management companies and AIFMs.
  • Follow-up to the consultation on asset segregation under AIFMD.
  • Development of a common procedure for the operation of the powers to impose leverage limits on an AIFM or group of AIFMs.
  • Information gathering and sharing of experiences on supervisory actions in relation to liquidity management tools.
  • Development of common practices on fees and expenses of investment funds.

In addition, ESMA will work on common approaches to UCITS eligible assets, the operation of home and host responsibilities under UCITS and AIFMD, a peer review on compliance with the guidelines on ‘ETFs and other UCITS issues’ and possible stress testing methodologies for funds.

A recent example of ESMA’s supervisory convergence work was its Opinion that hedged UCITS share classes (other than for currency) are effectively a different pool of assets and should not be allowed, but rather should be separate funds or sub-funds. Any such existing share classes should be closed for investment by new investors by the end of July 2017 and for additional investment by existing investors by July 2018.

On a European level, the responses by the national regulators, to this guidance, will be interesting. Will those countries that have allowed share classes that allow hedging other than for currency risk purposes now fall into line with ESMA’s opinion or choose not to follow it? And if they do not, might other national regulators prohibit the cross border distribution of those share classes into their countries?

It is widely expected that the Central Bank will adopt ESMA’s Opinion and that it will replace its current Guidance. The principles set out in the Opinion are broadly in line with the current regulatory treatment of share classes by the Central Bank. However, having said that, the Central Bank does permit interest rate hedging at share class level, a practice which is likely to become prohibited. If that is the case these share classes may have to close to new investment in accordance with the timelines set out above and, eventually, convert to separate funds or sub-funds.

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