Insights Blog

Today the European Securities and Markets Authority (“ESMA“) published a Call for Evidence as part of its review of the Eligible Assets Directive (“EAD“). The objective of this Call for Evidence is to gather information from stakeholders on market practices, interpretation and practical application issues with respect to the eligibility criteria set down in the EAD, and to assess the possible risks and benefits of UCITS gaining exposure to certain specified asset classes.

This follows the European Commission’s (the “Commission“) formal request to ESMA in June 2023 to provide technical advice on the review of the EAD. At the time, the Commission mandated ESMA to carry out an assessment of the implementation of the EAD in EU Member States, to analyse whether any divergences have arisen in this area and to provide a set of recommendations on how the EAD should be revised to keep it in line with market developments.

Read more about the Commission’s request in our briefing here.

UCITS are the key retail investment product in the EU, accounting for around 75% of all collective investments by retail investors. The acclaimed success of UCITS as a global brand is based on their established reputation of being well-regulated and supervised investment products. UCITS invest in assets that are subject to stringent eligibility criteria, with a view to ensuring adherence to the investor protection principles underlying the UCITS Directive.

Since the adoption of the EAD in 2007, both the number and variety of financial instruments traded on financial markets have increased considerably, leading to uncertainty in determining whether some categories of assets are eligible for investment, in turn giving rise to divergent interpretations of the UCITS Directive. ESMA’s technical advice on the review of the EAD is intended to preserve and strengthen the well-functioning UCITS framework and the operation of UCITS in the best interest of investors, as well as the quality of investment products offered to retail investors.  

The Call for Evidence is divided into separate sections which seek to collect evidence on the following aspects of the ESMA mandate for technical advice:

  • Convergence issues and clarity of key concepts: These questions cover the clarity of key concepts and potential interpretation and convergence issues with respect financial indices, money market instruments, the notions of “liquidity” or “liquid financial assets”, as well as presumption of liquidity and negotiability, amongst others. It also covers transferable security, valuation and risk management-related criteria, the concept of “embedded” derivatives and treatment of delta-one instruments. The questions also address the application of rules on UCITS investing in other UCITS and alternative investment funds (“AIFs“).
  • Direct and indirect UCITS exposures to certain asset classes: These questions target possible risks and benefits of UCITS gaining exposure to asset classes on which there are divergent views as regards their eligibility as UCITS investments. This covers both direct and indirect exposures such as via so-called delta-one instruments, (embedded) derivatives and replication of financial indices. ESMA is seeking input on merits of allowing UCITS exposure to certain asset classes (e.g. structured/leveraged loans, collateralised loan obligations (“CLOs“), catastrophe bonds, contingent convertible bonds (“CoCo bonds“), emission allowances, Real Estate Investment Trusts (“REITs“), commodities (including exchange-traded), crypto assets, unlisted equities).  The questions in this section are aimed at further solidifying ESMA’s understanding on the extent to which UCITS have gained direct and indirect exposures to these asset classes.

In terms of next steps, the deadline for feedback is 7 August 2024. Taking into account the evidence collected, ESMA will then develop its technical advice for the Commission, which is due to be delivered by 31 October 2024.