Explanatory Memorandum to COM(2021)721 - Amending directives 2011/61/EU, 2009/65/EC on delegation arrangements, liquidity risk management, supervisory reporting, depositary and custody services, loan and funds - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)721 - Amending directives 2011/61/EU, 2009/65/EC on delegation arrangements, liquidity risk management, supervisory reporting, ... |
|---|---|
| source | COM(2021)721  |
| date | 25-11-2021 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
This legislative proposal puts forward amendments to the Alternative Investment Funds Manager Directive (AIFMD – Directive 2011/61/EU) 1 and, to the relevant extent, to the Directive relating to undertakings for collective investment in transferable securities (‘UCITS’) (UCITSD – Directive 2009/65/EC). 2
The Commission reviewed the application of the scope of the AIFMD as mandated by Article 69 of the Directive. The Commission considered that a number of issues highlighted in the AIFMD review are equally relevant for the activities of UCITS. Consequently, this legislative proposal aims to address these issues by amending AIFMD and UCITSD to better align their requirements.
The AIFMD was adopted on 8 June 2011 as part of the policy response to the global financial crisis, which exposed weaknesses and vulnerabilities in certain fund activities that could amplify risks to the broader financial system. 3
As a post-crisis regulatory initiative, the AIFMD seeks a coherent supervisory approach to the risks that the activities of Alternative Investments Funds (‘AIFs’) may generate or convey to the financial system. The Directive also aims to provide high-level investor protection while facilitating the integration of AIFs in the EU market. 4 Alternative Investment Funds Managers (‘AIFMs’) are required to effectively manage risks and ensure adequate transparency of the activities of AIFs they manage. In fulfilling these requirements, they are able to manage and market AIFs to professional investors across the Union with a single authorisation from their home supervisor. 5 The AIFMD has become a significant pillar of the Capital Markets Union (‘CMU’) 6 thanks to the ability of investment funds to offer access to market-based sources of financing and to enable investors to better allocate their savings over the chosen time horizon in accordance with their preferences.
The Commission’s appraisal of the scope and functioning of the AIFMD legal framework concludes that the AIFMD standards for ensuring high levels of investor protection are mostly effective. 7 The rules on conflicts of interest, disclosure and transparency requirements are necessary to protect investors. Requirements on valuation, which is necessary for establishing each investor’s share in a given AIF and for monitoring the AIF’s performance, have increased discipline and structure in the asset valuation process. Finally, the depositary regime establishing the duties and liability of depositaries, including safekeeping AIF assets and overseeing AIF activities, safeguards investor interests. It also supports the orderly functioning of the investment funds market.
The financial stability and market integrity are key objectives of the AIFMD. 8 The AIFMD introduced tools to improve macro-prudential monitoring and supervision of financial stability risks. AIFMs are required to report to supervisors on the main AIF exposures, their liquidity profile and leverage. Supervisory reporting has supported effective macro-prudential supervision and it is helpful for market monitoring but the granularity of the reported data could be improved. The AIFMD created an effective supervisory cooperation network coordinated by the European Securities and Markets Authority (‘ESMA’), which is contributing to the convergence of supervisory approaches to the AIF activities in the European Union.
The Commission’s assessment indicates that the AIFMD is generally meeting its objectives and that the EU-wide harmonisation of regulatory standards has facilitated integration of the European collective investment fund market. 9 The investment fund sector has roughly tripled in size since 2008, from € 5.5 trillion assets to more than € 15 trillion assets, and its assets as a percentage of total financial sector assets have grown significantly. 10 It has interconnections with the broader financial sector, making it important to manage potential systemic risks appropriately. 11
The AIFMD contains general rules on liquidity management, on the use of leverage and on the valuation for managing risks at fund level. However, these requirements are not specific enough to fully capture the specificities of managing direct lending activities by AIFs and to address the potential micro and macro risks. Regulatory fragmentation, where national frameworks are established to govern loan-origination by funds, leads to difficulties in identifying and reacting effectively to potential market wide effects that may result from the activities of such funds. Moreover, diverging national regulatory approaches undermine the establishment of an efficient internal market for loan-originating AIFs by promoting regulatory arbitrage and varying levels of investor protection.
Furthermore, the review highlighted that the market data submitted to the supervisory authorities has gaps or lacks the requisite detail thus impairing the authorities’ ability to identify the build-up and spill over of risks to the broader financial system. The legislative proposal aims 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. 12
Liquidity Management Tools (‘LMTs’) allow the managers of open-ended funds, which include open-ended AIFs and all UCITS funds, to address redemption pressures under stressed market conditions and better protect investor interests. The European Systemic Risk Board (‘ESRB’) and ESMA recommend harmonisation of the rules on the use of LMTs. Currently, the AIFMD and UCITSD do not provide for a minimum harmonised set of LMTs. 13
In addition, investor interests could be better served if the AIFMD rules were amended to increase efficiencies in the market of depositary services. The current AIFMD requirement that a depositary should be located in the same Member State as the appointing EU AIF is difficult to fulfil in smaller, more concentrated markets, where there are fewer service providers. Lack of competition leads to increased costs for fund managers and less efficient fund structures, which can affect investor returns. There is potential to increase efficiency gains in managing investment funds by diluting depositary market concentration in certain national markets while ensuring that service providers uphold European standards.
There is evidence that depositaries are sometimes prevented from performing their duties where the fund’s assets are kept by a Central Securities Depositary (‘CSD’). 14 CSDs are not considered delegates of the depositary. 15 This legal situation does not guarantee in all cases a stable flow of information between the custodian of an AIF’s or UCITS’ asset and the depositary. Consequently, depositaries cannot fulfil their oversight duties effectively if there is no stable flow of information on the portfolio movements. This legal situation can undermine investor protection.
The delegation regime in the legal frameworks for AIFMs and UCITS allows for the efficient management of investment portfolios and for sourcing the necessary expertise in a particular geographic market or asset class. This model contributes to the success of the EU fund and manager labels. At the same time, the evaluation concludes, as supported by ESMA, that different national supervisory practices in fulfilling EU requirements for delegation of risk or portfolio management to third parties create inconsistencies that may reduce the overall level of investor protection. 16 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.
Additional measures would be necessary in order to implement the requirements of the Directive ensuring that AIFMs deploy the necessary human resources to perform retained tasks where some of their functions are delegated to third parties, and in order to transfer a large part of the implementing rules, as laid down in the Alternative Investment Fund Managers Regulation (‘AIFMR’) in this area, to the UCITS regulatory framework. 17 These measures would be set out in the Commission’s implementing acts once the mandate to do so is granted by means of adopting this proposal for amending the directives.
Changes are proposed to both AIFMD and UCITSD on delegation, liquidity risk management, data reporting for market monitoring purposes and regulatory treatment of custodians, whereas the AIFMD alone should be amended as regards activities of loan-originating investment funds and access to depositary services across borders.
• Consistency with existing policy provisions in the policy area
The proposals to amend the European investment fund legislation are in line with the Commission’s plan for a CMU adopted on 24 September 2020. The aim of CMU is to enable capital to flow across the EU to the benefit of consumers, investors and companies, regardless of their location. The Covid-19 crisis has made it more urgent to deliver on CMU as market-based financing is essential for the European economy’s recovery and the return to long-term growth. The proposed legislative changes would support fund market integration, therefore helping to achieve those objectives.
In an efficient and effectively supervised CMU, loan-originating funds are able to provide an alternative source of financing to Europe’s corporates and SMEs opening up their access to a wider range of competitively priced funding options. 18 These funds have the potential to support directly job creation, economic growth, innovation, green transition and help recover from the Covid-19 pandemic. Loan-originating funds can also serve as a backstop or shock absorber when liquidity is constrained by continuing to provide loan financing when more traditional lenders have pulled back from the market. Therefore, the legislative proposals are aligned with the overall CMU strategy to continue building an internal market for financial services and making financing more accessible to European companies.
In addition, the proposed amendments to AIFMD and UCITSD aim to better protect investor interests by ensuring that the investment fund managers, which delegate their functions to third parties, adhere to the same high standards applicable across the Union.
Moreover, the AIFMD amending proposal contains measures regarding availability and use of LMTs during times of market stress. 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 supervisory reporting proposal contributes to establishing a common data space in the financial sector, which is part of the Digital Finance Strategy. 19 Data reported by AIFMs and UCITS would be part of an integrated data collection system that would deliver accurate, comparable, and timely data to European and national supervisory authorities, while minimising the aggregate reporting costs and burden for all parties.
In addition, the AIFMD review will have an impact on the AIFMs managing AIFs governed by the Regulation on European Long-term Investment Funds (‘ELTIF’) (ELTIFR – Regulation (EU) 2015/760). 20 ELTIFR is a European product regulation, which is reviewed in parallel with the AIFMD and a legislative proposal to amend ELTIFR is adopted on the same day as this proposal. AIFMs managing ELTIFs are likely to benefit from easier access to depositary services cross border, if those funds are located in smaller markets. Improving supervisory reporting requirements would also have a positive effect on the compliance burden of AIFMs managing ELTIFs in the longer run. Including CSDs in the custody chain would have a positive effect on investor interests with respect to the proportion of ELTIF’ holdings, which could be held in custody by the CSDs.
Another point of interaction of the ELTIFR and the amended AIFMD will concern loan origination activities. The proposed Directive would impose some general principles on AIFMs active in credit markets. The proposed thresholds for lending by AIFs to financial institutions are aligned with the diversification threshold applicable to those ELTIFs that are only marketed to retail investors. Should there be a divergence between AIFMD and ELTIFR, the ELTIFR product rules would apply as lex specialis.
• Consistency with other Union policies
Creating an internal market for loan-originating funds is expected to increase the availability of alternative sources of financing to the real economy. The activities of such funds in the credit market are likely to facilitate the transition to the sustainable future by investing in the green economy, therefore supporting broader objectives of the European Green Deal.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Articles 53 i TFEU (ex Article 47(2) EC) is the legal basis for Directives 2011/61/EU and 2009/65/EC. For the policy options chosen and the specific design of the rules, the appropriate legal base is Article 53 i TFEU on the taking-up and pursuing of activities by self-employed persons. This is used to regulate financial intermediaries, their investment services and activities.
The proposed improvements to the AIFMD seek to promote sound processes for loan origination by AIFs and to further market integration in this segment, while ensuring that the risks to the financial stability are better monitored overall. Rules on availability and use of liquidity management tools by AIFMs and UCITS need to be harmonised to ensure that any response by fund managers of open-ended funds or by supervisors in market stress situations is more effective. Making access to cross-border provision of depositary services easier aims to further integration of the EU AIF market ensuring a high level of investor protection. The proposal seeks to achieve a coherent approach to delegation activities by European investment fund managers and supervisors.
Unilateral actions by Member States cannot fill in the AIFMD regulatory gaps and achieve these objectives individually. Therefore, the Union may adopt measures in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union.
• Subsidiarity (for non-exclusive competence)
The AIFMD and UCITSD were adopted in full respect of the principle of subsidiarity, pursuing the inherently transnational objectives to remove market fragmentation, address the risks to financial stability and ensure a high level of investor protection. The Directive was the instrument chosen to strike an appropriate balance between the EU-level and the national level.
The improvements to the AIFMD and UCITSD that are proposed complete this regulatory edifice with additional regulatory requirements and clarifications, aims to preserve the balance between harmonising key risk control measures and preserving Member State flexibility to implement the agreed regulatory standards.
• Proportionality
The proposed amendments respect the principle of proportionality, as set out in Article 5 of the Treaty on European Union (TEU), and do not go beyond what is necessary to achieve the objectives of completing a single market for AIFs, while ensuring a coherent approach to macro-prudential oversight of the EU AIF market and high-level investor protection.
Where appropriate, new requirements imposed on AIFMs managing loan-originating AIFs are designed as general principles. Where the regulatory requirements are specific, they do not unnecessarily disrupt existing business models. As regards investor protection, the proposed additional disclosure requirements are in line with the best market practice that should be extended to all investors in the Union ensuring the same level of investor protection.
The proposals to enable cross-border access to the depositary services strikes the right balance between the AIF and investor needs averting the risks that might materialise if there was no comprehensive regulation of the depositary services at EU level. In addition, including CSDs into the custody chain is necessary to close the regulatory gap that undermines the ability of depositaries to perform their duties and is potentially detrimental to AIF and UCITS investors. A proposed measure is proportionate and takes into account the status of already licenced entities.
The clarifications proposed to the delegation regimes preserve the valuable features of these activities while ensuring that sufficient human resources are deployed to supervise that the delegate and core functions are retained by the manager of an AIF or UCITS.
Consequently, the legislative proposal is proportionate to the objectives pursued.
• Choice of the instrument
This proposal amends Directives 2011/61/EU and 2009/65/EC. Therefore, it is most appropriate to choose a Directive as an instrument for changing the existing rules.
The objective is to harmonise national rules that are increasing market fragmentation, creating inefficiencies in the AIF market and undermining the protection of AIF and UCITS investors. The proposal aims to harmonise and clarify regulatory standards that Member States will be able to transpose into their national laws, furthering internal market integration, improving market monitoring and ensuring the same level of investor protection across the Union. Therefore, a Directive introducing the necessary amendments to the existing Directives governing AIFM and UCITS activities is the most appropriate choice.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The Commission conducted an evaluation of the AIFMD and concluded that the AIFMD has generally worked well and largely achieved its objectives of establishing an effective supervisory framework for AIFMs, ensuring high levels of investor protection and facilitating the creation of the EU AIF market. However, in order to take account of new developments in the market since the AIFMD’s entry into force, it could benefit from improvements targeting those elements of the framework that were not sufficiently addressed at the inception of the Directive.
Divergent national approaches make it difficult to provide services in another Member State and impede the development of the internal market for AIFs. Insufficient supply of depositary services and different national regulatory standards for loan-originating AIFs undermine the level playing field for AIFs. Moreover, different national rules on loan-originating AIFs and insufficient accessibility to market data for supervisors create difficulties for the supervisors to monitor the risk to financial stability and preserve market integrity. Similarly, the diverging availability of liquidity management tools limit effectiveness of a possible response by fund managers of open-ended funds or by supervisors in market stress situations. Finally, differing understanding of delegation rules by supervisors undermines legal certainty for fund managers and the high level of investor protection, in particular where European entities delegate risk or portfolio management outside the European Union.
• Stakeholder consultations
On 22 October 2020, a public consultation on the AIFMD review was launched with 102 questions on various aspects of the AIFMD review. It closed on 29 January 2021 with 132 responses.
Just over half of the respondents to the public consultation did not have an opinion on whether there is a need to harmonise requirements for AIFMs managing loan-originating AIFs. This group included the largest industry associations. 23% of the respondents were of the view that no further rules are needed, while among public authorities, 7 out of 10 Member States replying to the public consultation, agreed that the requirements for AIFMs managing loan-originating AIFs needed to be harmonised at EU level. They considered that EU rules are necessary to level the playing field and address the risks that may arise because of this activity. The proposal strikes a good balance between what is necessary for preserving financial stability and for facilitating the development of the market of loan-originating AIFs in the Union.
Similarly, a majority of the public authorities responding to the public consultation supported the proposition to clarify AIFMD and UCITSD delegation rules. In contrast, the vast majority of the respondents from the industry considers the delegation rules sufficiently clear to prevent the creation of letter-box entities in the EU. Nevertheless, some respondents wanted further clarification as to whether a business practice falls within the scope of delegation, since the Member States have differed significantly in their interpretation. The proposal provides the necessary clarifications while preserving the benefits of the delegation regimes under the AIFMD and UCITSD.
There is broad support among private and public sector stakeholders for harmonising liquidity management tools at the EU level (28/40 overall, 8/9 public authorities, 15/23 industry). There is also support for improving cooperation among National Competent Authorities (NCAs) in case of activating LMTs (15/40 overall, 5/9 public authorities, 6/23 industry), in particular in situations with cross-border implications. They support the proposal broadening the availability of LMTs across the Union and empowering fund managers as well as supervisors to use LMTs in stressed market conditions.
The majority of the stakeholders (approximately 70%) and ESMA (in its opinion) support bringing CSDs into the custody chain. The proposal is proportionate as it does not require depositories to perform due diligence on the European CSDs.
On the issue of smaller depositary markets, public authorities from the Member States indicated in their response to the public consultation that they supported the retained option to empower NCAs to permit procuring depositary services across borders. The majority of the respondents did not support introducing the depositary passport citing the risk of a concentration of the depositary market, lower investor protection and supervisory challenges. The Commission, therefore, is proposing a measure to open access to depositary services across the border where it is needed until the time where positive regulatory developments are observed in this area.
The majority of stakeholders preferred an incremental approach to potential changes to the supervisory reporting requirements for AIFMs and UCITS. This approach is adopted in the proposal, by mandating an in-depth feasibility study by the supervisors that include exploring potential synergies between the existing supervisory reporting requirements under different EU laws.
• Collection and use of expertise
In reviewing the AIFMD the Commission drew on the extensive preparatory work from an external contactor, which conducted a general survey and produced an evidence-based study on the effectiveness of the AIFMD. 21 The Commission also took into account takeaways from a virtual conference on the AIFMD review organised on 25 November 2020 and involving a Member of the European Parliament, national supervisors, ESRB, ESMA, representatives of the industry and investor interests. Furthermore, the Commission relied on data from Morningstar and on information presented in reports by ESMA, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) in addition to publicly available reports, studies, surveys, position papers and other relevant documents drawn up by private and public stakeholders. The Commission considered input from workshops, bilateral meetings and consultation with Member States and industry stakeholders, including asset managers, product manufacturers, retail investors’ representatives and investment funds active in alternatives investment. Finally, academic literature was reviewed, in particular literature on the effects of the AIFMD on the markets, financial stability and investor protection.
• Impact assessment
An impact assessment was carried out to prepare this legislative initiative.
On 16 July 2021, the Regulatory Scrutiny Board (‘RSB’) issued a positive opinion on the impact assessment (IA) submitted for the AIFMD review and requested further clarifications.
| Comments made in the RSB opinion | Action taken to address the comments in IA |
| The report should provide clearer explanations of the magnitude and the specificities of the problems, in particular in relation to loan originating funds and limited supply of depositary services. | DG FISMA added more detailed explanations of the problems. The explanations concern in particular: - the potential systemic risks posed by the growth in loan originating segment of the AIF market, the issues related to the development of fragmented national regimes on loan origination across the Union; -the situation on the markets suffering from a limited supply of depositary services and the need for an intervention at the Union level. |
| The report does not sufficiently explore all available options in a coherent manner, in particular regarding the harmonisation for the requirements for loan originating funds. | DG FISMA explained in more detail the basis on which the preferred option and its distinct components were selected and the rationale behind the discarded options as well as the main differences between all options. |
| The impact analysis should discuss the respective effects of harmonisation and risk reduction measures, as well as clarify the impact on the financing cost for SMEs. | DG FISMA added explanations regarding the effects of harmonisation, e.g. in relation to loan origination. It also explained the potential impacts of the initiative on the market and availability/cost of financing for SMEs. |
| The report should further elaborate the areas with simplification potential and provide quantification/ data, where possible. | DG FISMA provided anecdotal evidence and, where available, additional data, e.g. in relation to savings for depositaries and for the users of the depositary services in the smaller markets. Where data was missing, DG FISMA included further monitoring metrics to ensure that additional data will become available, e.g. in relation to reporting. |
It was considered whether to propose fewer measures for AIFMs managing loan-originating funds and leave the rest to the national discretion. Diverging national approaches to loan-originating funds, however, would risk not achieving the objective of supporting this sector’s safe and sustainable development. Therefore, the retained option proposed a minimum number of safeguards for the funds activities and risk profiles.
The retained option will benefit small and medium-sized enterprises (SMEs)s, notably the harmonisation of requirements for AIFMs managing loan-originating AIFs. Apart from supporting greater efficiency in managing such AIFs, the retained option aims to enable AIFs to extend credit to businesses across the border. In some Member States AIFs are not allowed to originate loans, or this right is reserved for locally established funds. This review would further integrate the loan-originating fund market and create more business opportunities for those funds. As a result, this would open up alternative sources of financing for SMEs in particular where they are unable to secure credit from the banks.
On the issue of delegation, granting ESMA more powers was considered to ensure a more coherent enforcement of the relevant AIFMD and UCITS rules in the Union. However, at this point this option was considered to be in contrast with the principle of subsidiarity. It was concluded that ESMA should be provided with more information on delegation arrangements in the cases where risk or portfolio management is delegated outside the Union and make use of already available powers, such as conducting peer reviews. The retained option would seek to ensure a homogeneous level of investor protection across the Union.
It was considered to revise AIFMR supervisory reporting requirements without seeking synergies with other existing reporting frameworks was considered. Any change to the supervisory reporting obligations is bound to entail significant compliance costs. Therefore, it was considered more practical to propose legislative changes when there is more clarity what is needed to move closer to a common data space in the financial sector. The proposal contributes to this objective by involving the European Supervisory Authorities (ESAs) and the European Central Bank (ECB) in a study on the feasibility of merging the duplicative reporting requirements and expanding data coverage to enable better monitoring of markets. When supervisory reporting is improved, this would have a positive effect on monitoring and managing the risks to financial stability.
Similarly, for liquidity risk management different levels of intervention to ensure financial stability were considered. The chosen option is the least prescriptive. Fund managers of open-ended funds would be able to suspend the repurchase or redemption of the AIF or UCITS units or shares temporarily. They would also be required to choose at least one other liquidity management tool, without imposing which one, thus leaving fund managers with the final decision, which they could activate should circumstances so require. This measure would support the financial system’s stability.
Introducing a depositary passport was considered as an option. However, this options was not deemed feasible given the absence of EU harmonisation of securities and insolvency laws. The retained option, therefore, proposes to permit cross-border access of depositary services where needed until further harmonisation at the Union level becomes feasible. The retained option would result in more efficient EU AIF market.
Finally, it was considered whether depositaries delegating custody of AIF or UCITS assets to CSDs should perform due diligence. It was decided that this would be excessive, given that authorised CSDs are already subject to stringent sectorial requirements and supervision. Therefore, the proposal focuses on including the CSDs into the custody chain without imposing superfluous due diligence requirements on depositaries.
• Regulatory fitness and simplification
The overall approach taken in the AIFMD review is to propose measures, which are strictly necessary in the interest of financial stability, market integration or investor protection, and address issues where there are clear stakeholder concerns.
The proposed amendment enabling depositary services to be sourced across the border is expected to generate savings for both depositaries and the users of the depositary services, including smaller AIFMs. The one-off fees for new licence and the annual licence fees for depositaries range respectively between € 6000 and € 9200 depending on the Member State and between € 4,400 – € 9,400 depending on the Member State. The increased competition between depositary service providers is likely to exert downward pressure on the service price.
The envisaged approach to supervisory data will simplify and streamline the current reporting obligations. It will entail savings in the longer run because it aims to reduce the number of public authorities, to which an AIFM reports overlapping data. The approach also ensures that one-off costs arising from the amendments are minimised as much as possible, by providing for proper up-front planning and a wholesale view to supervisory reporting across different pieces of EU legislation, taking into account developments in the digital environment.
• Fundamental rights
The proposal promotes rights enshrined in the Charter of Fundamental Rights (the ‘Charter’). The main objective of this initiative is to facilitate the right to provide services in any Member State, as prescribed by Article 15(2) of the Charter, ensuring that there is no discrimination, even indirect, on grounds of nationality (further implementing Article 21(2) of the Charter).
4. BUDGETARY IMPLICATIONS
The proposal does not have a budgetary impact for the Commission.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
This Directive will be subject to evaluation 5 years after the date of its transposition. The Commission will rely on (i) feedback from the public consultation, (ii) discussions with ESMA and supervisors and (iii) the supervisory reporting data.
The Commission will ensure compliance and enforcement on an ongoing basis. ESMA will monitor application of the delegation requirements based on its new mandate to conduct targeted peer reviews in this area every year and to draft reports on the analysis of delegation notifications.
ESMA will also collect data that will be useful for monitoring developments in the loan-origination and depositary markets. ESMA will continue collecting and analysing data on the use of LMTs.
• Detailed explanation of the specific provisions of the proposal
Contents
Article 4 is complemented with the definition of a ‘central securities depository’, in line with Regulation (EU) 909/2014 22 .
Article 6 i is amended to extend the list of ancillary services that AIFMs could provide in addition to collective investment management. It would include activities permitted by other Union laws, like administration of benchmarks or credit servicing.
Article 6(6) is amended to update the references to the rules laid down in Directive 2014/65/EU 23 that applies to AIFMs providing ancillary services.
Article 7(2) is amended to clarify that AIFMs should have appropriate technical and human resources envisaged when applying for an AIFM authorisation. Therefore, when applying for the authorisation, the human and technical resources, which will be used to carry out its functions and to supervise the delegates, must be described in detail.
Article 7(5) is supplemented to ensure that the missing information is collected at the EU level to map out delegation practices. Therefore, it is proposed that ESMA should receive notifications of delegation arrangements where more risk or portfolio management is delegated to third country entities than is retained.
Article 7(8) is inserted to ensure that ESMA receives consistent information on the delegation arrangements. Thus, it is proposed to empower ESMA to develop draft regulatory technical standards prescribing content, forms and procedures for the transmission of delegation notifications. To facilitate informed policy decision in this area, ESMA is required to present the EU co-legislators and the Commission (Article 7(9)) with regular reports analysing market practices regarding delegation, compliance with the requirements applicable to delegation under Directive 2011/61/EU and supervisory convergence in this area.
Article 8(1)(c) is amended to provide that an AIFM employs at least two persons full-time or engages two persons, who are not employed by the AIFM but nevertheless are committed to conduct that AIFM’s business on a full-time basis and who would be resident in the Union, thus ensuring the minimum, stable substance within the AIFM.
Article 15(3)(d) is inserted to require that AIFMs managing AIFs, which grant loans, implement effective policies, procedures and processes for the granting of loans. In doing so, they must assess credit risk, and administer and monitor their credit portfolios, which should be reviewed periodically.
Article 15(4a)(4b)(4c) is inserted to reduce the risk to the financial system by restricting lending to a single borrower, when this borrower is a financial institution.
Article 15(4d) is inserted to avert potential conflicts of interest by forbidding an AIF to lend to its AIFM or its staff, its depositary or its delegate.
Article 15(4e) is inserted to avoid moral hazard situations where the loans are originated to be immediately sold off on the secondary market. For this, it is proposed that AIFs be required to retain an economic interest of 5% of the notional value of the loans they have granted and sold off.
Article 16(2a) is inserted to avoid maturity mismatches that may create financial risks. It is, therefore, proposed to require that AIFs adopt a closed-ended structure where they engage in loan origination to a significant extent (60%).
To effectively address micro-prudential and macro-prudential risks, Article 16 is supplemented with paragraphs (2b) and (2c) to enable AIFMs managing open-ended AIFs to access the necessary tools for liquidity risk management in exceptional circumstances. In addition to being able to suspend redemptions, it is proposed that such AIFMs be required to choose at least one other LMT from the Annex V, which harmonises the minimum list that should be available anywhere in the Union. Article 16(2e) requires Member States to ensure this is the case in their jurisdictions. Paragraph (2d) is added requiring AIFMs to notify the competent authorities about activating or deactivating a LMT.
Article 16(2g) and (2h) seeks to ensure a coherent application of paragraphs (2b) and (2c) in the same Article. ESMA is, therefore, tasked with developing draft regulatory technical standards to provide definitions and specify the characteristics of the LMTs set out in the Annex and tasked with developing regulatory technical standards on selecting and using suitable LMTs by the AIFMs.
Point (j) in paragraph (2) of Article 46 is amended, empowering the competent authorities to require that an AIFM activates or deactivates a relevant LMT. This power is extended to cover non-EU AIFMs too by adding point (d) in paragraph i of Article 47. Proposed paragraphs (5a) to (5g) of Article 50 request that competent authorities notify other relevant authorities, ESMA and ESRB prior to requiring activation or deactivation of a liquidity management tool. The proposed paragraphs also lay down the principles of cooperation in such cases. Proposed paragraph (7) in Article 50 would empower ESMA to develop regulatory technical standards indicating when the competent authorities’ intervention would be warranted.
Article 20 i is amended to clarify that delegation arrangements apply to all functions listed in Annex I and to the ancillary services permitted under Article 6 i. The language referring to services and not only functions is introduced accordingly in point (f) of Article 20 i and paragraphs 3, 4 and 6 of Article 20.
The last indent of Article 21 i is amended to bring central securities depositories (CSDs) into the custody chain where they are providing competing custody services thus levelling the playing field among the custodians and ensuring that depositaries have access to the information needed to carry out their duties. It is proposed to relieve depositaries from the requirement to perform ex-ante due diligence where the custodian is a CSD because it has been sufficiently vetted when seeking to be authorised as such.
To ensure better supervision, Article 21(16) is amended so that depositaries cooperate not only with their competent authorities but also with the competent authorities of the AIF that has appointed it as a depositary and with the competent authorities of the AIFM that manages the AIF.
Article 23 is supplemented in paragraphs i and i to improve the transparency of AIFM activities for investors, with additional disclosures that AIFM must ensure, namely conditions for using LMTs and fees that will be borne by the AIFM or its affiliates and periodical reporting on all direct and indirect fees and charges that were directly or indirectly charged or allocated to the AIF or to any of its investments. AIFMs are also required to report to investors the portfolio composition of originated loans.
Article 24 i is amended and point (d) in Article 24(2) is deleted thus removing limitations in paragraph i on the data that competent authorities should be able to receive from AIFMs on its managed AIFs. It is proposed that ESMA develops draft regulatory technical standards and draft implementing technical standards to replace the current supervisory reporting template laid down in Annex IV of the AIFMD supplementing AIFMR.
By inserting Article 38a, ESMA is required to regularly conduct a peer review of supervisory practices in applying rules on delegation with a particular focus on preventing the creation of letter-box entities. A new Article 69b would require the Commission to review the delegation regime laid down in Directive 2011/61/EU and its implementing measures with a view to proposing the necessary amendments to preclude the formation of letter-box entities. The possibility to introduce the depositary passport and the functioning of the rules for AIFMD managing loan-originating AIFs should also be evaluated.
Supervisory cooperation is strengthened by inserting paragraph (5a to 5g) in Article 50. The competent authority of a host Member State of the AIFM may request the competent authority of the home Member State of the AIFM to exercise its supervisory powers specifying reasons for its request and notifying ESMA and the ESRB, if there are risks to financial stability. Amendments to paragraph (5) in Article 50 lower the burden of proof for the competent authorities by requesting that the recipient authorities take appropriate action. Moreover, ESMA is empowered to request a competent authority to present before its standing committee a case, which may have cross-border implications or an impact on financial stability or investor protection. Moreover, Article 50(7) mandates ESMA to draft regulatory technical standards indicating in which situations the competent authorities may exercise the powers in relation to LMTs.
It is proposed to amend paragraph (5) of Article 61, permitting the competent authorities to allow depositary services to be procured in other Member States until the measures are taken following a review of the need to introduce a depositary passport.
It is proposed to amend Annex I by adding point (3) to recognise lending as a legitimate activity of AIFMs . This means AIFs could extend loans anywhere in the Union, including cross-border. Point i is added to Annex I to legitimise servicing of securitisation special purpose entities (‘SSPEs’) by AIFMs.
Amendments are proposed to Articles 21(6)(c), 35(2)(b), 36(1)(c), 37(7)(e), 40(2)(b) and 42(1)(c) updating the requirements for third country entities not to be established in the jurisdictions identified as high risk countries according to the latest European laws against money laundering.
Articles 36 i and 42 i are complemented with the respective points (d) and (d) providing that non-EU AIFs or non-EU AIFMs that are subject to national rules and that are active in individual Member States should satisfy the requirement that they are not located in a third country that is deemed un-cooperative in tax matters.
Amendments are proposed to Articles 21(6)(d), 35(2)(c), 37(7)(f) and 40(2)(c) to update the requirements for third country entities which would have access to the internal market only if they are established in third countries that are not listed on the EU list of non-cooperative jurisdictions for tax purposes.
Article 47(3) is amended enabling ESMA to disclose the market data at its disposal in an aggregate or summary form therefore relaxing the confidentiality standard.
A review clause is inserted - Article 69b - mandating the Commission to initiate review of the provisions relating to delegation, depository services and the use of LMTs. It also mandates ESMA to issue a report aimed to streamline supervisory reporting requirements for AIFMs and take it as a basis for developing draft regulatory technical standards for supervisory reporting under Article 24 of AIFMD.
In Article 2 i it is suggested to provide the definition of a ‘central securities depository’, in line with Regulation (EU) 909/2014.
In the last indent of Article 22a the fourth paragraph is amended to deem central securities depositories (CSDs) as delegates of the depositary where they are providing competing custody services. This levels the playing field among the custodians and ensure that depositaries have access to the information needed to carry out their duties.
Article 7(1)(b) is amended to provide that a UCITS management company employs at least two persons full-time or engages two persons, who are not employed by the UCITS management company but nevertheless are committed to conduct the business of that UCITS management company on a full-time basis and who would be resident in the Union, thus ensuring the minimum, stable substance within the UCITS management company.
Points (c) and (e) in Article 7 i are proposed for amendment to clarify that the management companies should have appropriate technical and human resources to be used when applying for the authorisation. Therefore, when applying for the authorisation, the management company has to describe in detail the human and technical resources, which it will use to carry out its functions and to supervise the delegates.
Article 13 i clarifies that the delegation arrangements apply to all the functions listed in Annex II and to the ancillary services permitted under Article 6(3). The language referring to services and not only functions is introduced accordingly in points (b), (g), (h) and (i) of Article 13 i.
To better align the Directives’ 2011/61/EU and 2009/65/EC legal frameworks for delegation and so that the supervisory authorities can review the reasons for delegation it is proposed to require UCITS to justify its entire delegation structure based on objective reasons, by inserting point (j) in Article 13 i.
Article 13 is supplemented by paragraph (3) to ensure that the missing information is collected and analysed at the EU level to map out delegation practices. Therefore, it is proposed that ESMA should be notified of delegation arrangements where more risk or portfolio management is delegated to third-country entities than is retained.
To facilitate informed policy decision in this area, it is suggested that under the new Article 13(5) ESMA be required to present to the EU co-legislators and the European Commission regular reports analysing market practices on delegation and compliance with the requirements applicable to delegation under 2009/65/EC.
Article 13(3) is inserted to ensure that ESMA receives consistent information on the delegation arrangements. Thus, it is proposed that ESMA be empowered to develop draft regulatory technical standards prescribing content, forms and procedures for the transmission of delegation notifications.
A new Article 13(6) empowers the Commission to adopt a delegated act specifying further the conditions for delegation and the conditions under which the management company of UCITS is to be deemed a letter-box entity and therefore no longer considered the manager of the UCITS thus aligning the rules of Directives 2011/61/EU and 2009/65/EC in this area.
It is proposed to add Article 18a (1 and 2) so that, in addition to being able to suspend redemptions, UCITS management companies have to choose at least one other LMT from the Annex IIA, which harmonises the minimum list that should be available anywhere in the EU. The new Article 18a requires Member States to ensure this is the case in their jurisdictions. Annex IIA is proposed with the minimum list of such tools. To ensure the good information of investors, it is suggested to clarify in Schedule A of Annex I point 1.13 the procedures and conditions for the repurchase or redemption of units, and to clarify the circumstances in which repurchase or redemption may be suspended or other LMTs may be activated or deactivated.
Article 18a (3 to 5) seeks to ensure a coherent application of the preceding provisions. ESMA is, therefore, tasked with developing draft regulatory technical standards to provide definitions and specify the characteristics of the LMTs set out in the Annex.
A new Article 20a proposes to introduce for management companies a periodic supervisory reporting obligation on the markets and instruments in which they trades on behalf of the UCITS.
A new Article 20b proposes mandating ESMA, in cooperation with other ESAs and the ECB, to produce a feasibility report on seeking efficiencies in the supervisory reporting space. The report would inform about the potential design of a supervisory reporting template for the UCITS management companies, and ESMA is required to develop regulatory technical standards and draft implementing technical standards on the basis of its findings.
Article 22a(2) is amended to relieve depositaries from the requirement to perform ex-ante due diligence where the custodian is a CSD because it has been sufficiently vetted when seeking to be authorised as such.
To effectively address micro-prudential and macro-prudential risks, it is proposed a modification to Article 84(3) be amended to require UCITS management companies to notify the competent authorities about activating or deactivating a LMT. The amendment of point (b) in paragraph 2 of Article 84 empowers the competent authorities to step in and require UCITS management companies to activate or deactivate a relevant LMT. The proposed paragraphs (3a) to (3e) in Article 84 request that the competent authorities notify other relevant authorities, ESMA and ESRB prior to requiring activation or deactivation of a LMT and that they lay down the principles of cooperation in such cases. Proposed paragraph (3f) in Article 84 would empower ESMA to develop regulatory technical standards indicating when the competent authorities’ intervention would be warranted.
Article 84(5) proposes empowering ESMA to develop draft regulatory technical standards on selecting and using suitable LMTs by UCITS.
Article 98 is complemented with paragraphs (3) and i to strengthen supervisory cooperation. The competent authority of the UCITS host Member State may request the competent authority of the UCITS home Member State to exercise its supervisory powers specifying reasons for its request and notifying ESMA and the ESRB if there are risks to financial stability. Moreover, ESMA is empowered to request a competent authority to present before ESMA a case, which may have cross-border implications or an impact on financial stability or investor protection.
A new Article 101a is proposed to require ESMA to conduct, on a regular basis, a peer review of supervisory practices in applying rules on delegation with a particular focus on preventing the creation of letter-box entities. A new Article 110a would require the Commission to review the delegation regime laid down in this Directive and its implementing measures with a view to proposing the necessary amendments to preclude the formation of letter-box entities.
Article 3 of the proposal states that Member States have 24 months after the entry into force of the amending Directive to adopt and publish the laws, regulations and administrative provisions necessary to comply with that Directive. Member States shall communicate transposition measures to the Commission.
It is proposed that the amending Directive enters into force on the 20th day following its publication in the Official Journal of the European Union.